Thursday, December 9, 2021

Evergrande Defaults on Dollar Denominated Bonds

VIDEO: "China Evergrande Declared in Default for First Time"--Bloomberg  Markets and Finance (3 min.)

Fitch Ratings has downgraded Evergrande and its subsidiaries to "restricted default" because the company has failed to pay interest due earlier this week on two dollar-denominated bonds. The payments were actually due about a month ago, but there was a 30-day grace period. The grace period has passed without payment made as far as can be determined. CNN reports:

    Fitch noted that Evergrande made no announcement about the payments, nor did it respond to inquiries from the ratings agency. "We are therefore assuming they were not paid," Fitch said.

    Evergrande has about $300 billion in total liabilities, and analysts have worried for months about whether a default could trigger a wider crisis in China's property market, hurting homeowners and the broader financial system. The US Federal Reserve warned last month that trouble in Chinese real estate could damage the global economy. 

Relevant to the prepper, the article relates that "[t]he US Federal Reserve warned last month that trouble in Chinese real estate could damage the global economy." "Last Friday, the local government in Guangdong province, where Evergrande is based, said it would send a working group to Evergrande to oversee risk management, strengthen internal controls and maintain normal operations, at the request of the company." 

    Also, to counter a more general slump in the real estate market, China's central bank, The People's Bank of China, will be pumping $188 billion into the economy. Again, from CNN:

    The People's Bank of China on Monday said it would cut the reserve requirement ratio for most banks by half a percentage point, starting December 15. That move, which reduces the amount of money that banks have to keep in reserve, will unleash some 1.2 trillion yuan ($188 billion) for business and household loans.

    The decision — the second cut to that ratio this year — came on the same day China's Politburo signaled that it may take more aggressive actions to protect the economy in 2022. The Chinese Communist Party's leadership team, chaired by President Xi Jinping, said in a statement that "ensuring stability" would be a top priority in the coming year.

    As explained in the China Uncensored video below, the CCP is attempting to stave off a collapse of the real estate market by encouraging local governments to issue special bonds to be used for construction projects and ease restrictions on loans to developers.

VIDEO: "China 'Solves' Real Estate Debt Crisis"--China Uncensored (7 min.)

     Economists have warned for at least a decade that China's real-estate market was a bubble. It could be nothing else since much of the housing being built are shoddily constructed high-rise apartment blocks that are uninhabitable, lacking plumbing, electricity or elevators. In other words, the real estate market in China is not driven by market needs for housing or office space, but purely for investment purposes. And because it seemed such a sure bet, the Chinese people have poured their savings, the savings of relatives, and borrowed to get into the market. The Chinese government has largely ignored the downsides to this because the sale (in reality, lease) of land is one of the few ways local or provincial governments can raise money, and it provided a lot of make-work to keep employment numbers high.

    China's real estate market is not the only area of concern. China has heavily overinvested in long-distance, high-speed rail even in low-population density areas that do not generate enough traffic to justify the investment. In fact, China has spent nearly $1 trillion on these underused lines leading to a situation now where China Railway's debt carries interest payments higher than its current revenue. In fact, many of the lines do not have enough traffic to cover operating expenses. For more details, I've included some videos below that discuss the high-speed railway problem (if you only have time for one video, watch the one from China Insights):

VIDEO: "China Has A Debt Problem Three Times Larger Than Evergrande"--Economics Explained (14 min.)

VIDEO: "The Next Evergrande? China's $2 Trillion Railway Debt Bubble"--Wall Street Millennial (11 min.). 


2 comments:

  1. China doesn't have a debt problem. The people who loaned money to China have a debt problem.

    ReplyDelete

Ukraine War Update (May 13, 2022)

 You may have already read this since the Institute for the Study of War seems to be one of the major go-to sites for information on the war...