Thread by @LastBearStandng

🚨Evergrande / Tether / China Credit Situation: Update Thread👇👇

(This one covers a couple topics so stick with me)

2. FIRST - EVERGRANDE: The three public co's have resumed free fall this week on big volume. New equity out of the question. Through Tuesday:
3333.HK - Parent Company: -20%
6666.HK - Property Management: -22%
0708.HK - EVs: -36%

3. On debt side, USD Offshore bonds continue to fall. Below is the longest and shortest dated USD bond. Note @sunchartist notes liquidity is limited if any so these prices should be considered indicative. If someone has access to onshore data, please provide in comments:

4. Notably, while the shortest USD bonds (due March 2022) were more resilient initially, they have fallen from 85 to 61 since July 15. The market realizing this is not a long term issue credit - but immediate question of insolvency.

5. SECOND - TETHER: Since last thread speculating about Tether's tie to Evergrande or Chinese CP broadly, I've received info claiming to confirm Tether indeed is a player in the Chinese CP market, including Evergrande CP but also a lot of other distressed issuers (SOEs, etc)

6. Further, several have noted that USDT is already established as a backdoor financing system in China, particularly to avoid capital controls, launder money, or perhaps avoid regulatory oversite. So the plumbing for this kind of activity exists.

7. Several notes in just the past days have noted the risk of stablecoins as psuedo money markets/shadow banks. This BBG articles (quotes JPM) highlights the risks but focuses on the US market. Conclusions are correct - but the market of concern is China
bloomberg.com/news/articles/…

8. Thinking of Tether as a unregulated, massive Shadow Bank is probably the best framework. The bank exploded in size, then began to contract. Borrowers of liquidity came under pressure, impairing banks collateral. Bank may now be selling in illiquid market, creating reflexivity

9. Perhaps this is why the deputy governor of the PBOC is "quiet worried about global financial risks from digital currencies, particularly so-called stablecoins"
cnbc.com/2021/07/08/chi…

9. THIRD - CHINA CREDIT: For those looking for a deep dive on China's credit expansion and resilience, would recommend @rhodium_group Credit and Credibility (2018) and update note Credibility in the Balance (2020)
rhg.com/research/credi…
rhg.com/research/credi…

10. Rhodium argues the key to financial stability despite rapid credit growth and bad debt is Beijing's credibility. They argue that the highest potential for crisis would be in the backdrop of China shifting to break the implicit guarantee, leading to mass repricing of risk

11. This is the exactly what is happening now. SOEs have been allowed to default in record pace since late 2020, Huarong (state owned!) is still hanging in the wind. Market thinks there's little appetite to save an over-levered private co like Evergrande

12. Rather then demonstrate state support, they are taking a hacksaw to equity markets, seemingly intent on reining in the power, capital flow, and speculation it the private tech sector that had been on fire until recently. Hang Seng index now in freefall:

12. Beyond Beijing's willingness, there is the question of ability. Three months after Huarong failed to produce audit on April 1st, central regulators are now sending CITIC to "examine Huarong's finances". bloomberg.com/news/articles/…

13. This indicates to me that central regulators have really no idea what they are dealing with even months later, or now understand the problems may be much deeper entrenched and harder to solve.

14. To give you a sense of what they might be discovering - here is a summary of a deeper study completed in April 2021 that estimates non-performing loans (NPLs) are 2 - 4x higher than reported.
blogs.worldbank.org/allaboutfinanc…

15. The article and full study by @BenCharoenwong and team describe a practice by which Banks pass along NPLs through AMCs (which are supposed to unwind them) and warehouse them the B/S of private co's who are borrowers of the bank

16. FT reports last week that several provinces are "rushing to set up bailout funds for indebted state-owned firms". Only problem is that the size of the problem far exceeds such a simple solution
ft.com/content/d75dcb…

17. Meanwhile, the perp walk seems to have started. Notable Graft charges reported by Caixin since July:
- Chief of China's Mint
- Over 40 Provincial chief or bank regulators
- Development bank execs
- Enforcement chief of graft busters
- Chair of Interbank Clearing Platform

17. What happens next? No idea, but here is what I'll be looking at:
- PBOC moves to reduce stress (RRR cut, liquidity injections etc), or comments on specific issuers
- Credit/equity of other property developers
- Tether peg / BTC pricing
- VVIX, VIX for spillover in US markets

Finally, here are some good accounts that have on this for a while and putting out good realtime updates. Have also gotten some great info in DMs but won't list those names without their blessing
@sunchartist
@ImJames_K
@StateCommon

Another update. Here are two onshore CNY Evergrande bonds, due 2022 and 2024. Swan dive.

Finally - for ease of reference, below are three prior threads for background:

China Credit Risk Overview:

https://twitter.com/TheLastBearSta1/status/1399748954082971659?s=20

Evergrande Update:

https://twitter.com/TheLastBearSta1/status/1417492372573798412?s=20

Evergrande/Tether Update:

https://twitter.com/TheLastBearSta1/status/1418302465557110785?s=20