1/7
Important article by @Birdyword, who discusses the shift from bank loans to buyers' deposits in the liabilities of Chinese property developers. As usual I'm especially interested in the balance-sheet impact: as long as things are going...
wsj.com/articles/beiji…
Important article by @Birdyword, who discusses the shift from bank loans to buyers' deposits in the liabilities of Chinese property developers. As usual I'm especially interested in the balance-sheet impact: as long as things are going...
wsj.com/articles/beiji…
2/7
well, the shift barely matters, but it matters a great deal if the developer ever gets into trouble and is unable to finish a project.
This creates at least two problems. First, a default by a large developer can cause what is effectively a "run on the bank"...
well, the shift barely matters, but it matters a great deal if the developer ever gets into trouble and is unable to finish a project.
This creates at least two problems. First, a default by a large developer can cause what is effectively a "run on the bank"...
3/7
as other buyers around the country become reluctant to put up further deposits with other property developers. This process that can be highly self-reinforcing as it forces property developers to cut back further on operations, and so alienate even more deposits.
as other buyers around the country become reluctant to put up further deposits with other property developers. This process that can be highly self-reinforcing as it forces property developers to cut back further on operations, and so alienate even more deposits.
4/7
Of course the more developers rely on deposits to fund their operations, the more likely it is that a problem with one large developer spreads to other developers around the country. Regulators can force banks to lend, but they can't force households to put up deposits.
Of course the more developers rely on deposits to fund their operations, the more likely it is that a problem with one large developer spreads to other developers around the country. Regulators can force banks to lend, but they can't force households to put up deposits.
5/7
Second, Beijing will have to choose either to let households take the loss or to force banks to step in and make them whole. The former seems politically unlikely, but the latter means that what had looked like a reduction...
Second, Beijing will have to choose either to let households take the loss or to force banks to step in and make them whole. The former seems politically unlikely, but the latter means that what had looked like a reduction...
6/7
in banks' exposure to real estate developers was never a meaningful reduction at all but rather the conversion of direct liabilities into contingent liabilities. For all the regulatory agitation, in other words, there was never an improvement in financial-sector risk.
in banks' exposure to real estate developers was never a meaningful reduction at all but rather the conversion of direct liabilities into contingent liabilities. For all the regulatory agitation, in other words, there was never an improvement in financial-sector risk.
7/7
For many years we've seen that "deleveraging" in China has meant reducing leverage in one part of the economy while increasing it in another. This isn't incidental. It is fundamental to the way the growth model works.
For many years we've seen that "deleveraging" in China has meant reducing leverage in one part of the economy while increasing it in another. This isn't incidental. It is fundamental to the way the growth model works.
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