🚨🚨A Timeline of Contagion (9/8/21)πŸ‘‡πŸ‘‡

Why do I believe contagion in the property sector could cause a Chinese banking crisis? Well, because its been underway for some time...

2. Evergrande is the Gorilla, but it is not unique nor is it the first. Below is the debt and equity trading of large stressed developers, in chronological order from when their debt began to fall. (these are USD bonds - onshore debt would be better but data is less accessible)
3. The First Domino: China Fortune Land Development ($61bn of liabilities): Defaulted in January - the first major default of this tightening cycle. Ping An - largest insurer in China - reported a $5.5bn loss relating to China Fortune in its 1H21 results. Image
4. China South City Holdings ($10bn of liabilities): Bonds trading at 100 as of Jan21 but has consistently traded down since February with a big step down in the past two weeks. Current price: 69. Current yield: 42%. Image
5. Yuzhou ($21bn of liabilities): Massive debt selloff in late March. Since then, its debt has remained surprisingly sturdy although its equity continues to fall. Image
6. Sichuan Languang ($31bn of liabilities): Initial weakness showed up in February but legged down in April before settling at just 25c on the dollar in July. Pricing now solely on recovery. Image
7. Evergrande ($304bn of liabilities): The Gorilla. You know the story. After surviving a big scare in Sept 2020, its debt stabilized for 9 months, until it began to sink in June. Three months later the most indebted developer in the world is functionally insolvent. Image
8. Central China Real Estate ($23bn of liabilities):

2024 USD bond prices:
January: 100
July: 87
Sept: 68 Image
9. RiseSun ($36bn of liabilities):
Issued a new USD bonds on January 11th at 100.
Price on July 5: 87.
Price on Sept 6: 59.

*swings in the debt since June show what illiquidity looks like* Image
10: Sunshine City ($7bn of liabilities):
Smaller fish, same story. Selloff has accelerated in the past 6 weeks. Clearly illiquid but the trend is one-way. Image
11. Fantasia ($12bn of liabilities):
Post Evergrande - things are falling faster. Bonds traded at par in June. By September, banks stopped accepting it as collateral: bloomberg.com/news/articles/… Image
12. Guangzhao R&F ($51bn of liabilities): This is *shit your pants* territory. R&F is a major developer that did not even show stress even as Evergrande began to fall. The chart below speaks for itself: Image
13. What does this tell us? First - Evergrande is not unique, rather its one of many. Second - collateral has been getting squeezed for months as defaults mount. Third - the most recent selloffs have been more abrupt and violent in issuers whose stress emerged just weeks ago.
14. Its not coincidental - its a chain reaction. If a developer defaults, lenders cut lending to its peers. As lending dries, it makes those peers much more likely to fail. Each default also decreases the expected recovery as fire sales crush the market of the underlying.
15. Combined, the names above - each in default or significant stress - represent over half a trillion dollars of total liabilities. Liabilities are not just debt, but payments to suppliers, employees, remaining construction costs etc. The whole ecosystem is on the brink.
16. The key questions at this point are (1) which developers are next and (2) will this spill into the bank sector, which I believe poses the largest systematic risk
17. On (1) the developers that would pose the highest risk to the system based on size and leverage are Greenland and Sunac (each over $150bn in liabilities). Vanke and Country Garden probably follow. So far their debt remains sturdy, but that can change quickly.
18. On (2) Rural banks with the highest exposure to the worst property markets would be the most obvious candidates. But it could come from elsewhere less obvious as well- recall Ping An.
19. Regulators are probing Ping An - the only insurer labeled "systematically important" and down 40% since January. Most reporting suggests losses were direct investment - but they were ordered to stop selling "alternative investment products". Hm..
20. To reiterate a point I've made repeatedly - we quote bond prices because its the only data we have. Most lending however is bank and trust loans - much more opaque. But we know that these banks have massive loan exposure to these developers and their collateral is withering.
21. While the situation continues to deteriorate - there still seems to be no *plan* at all. Recent central comments have stressed the importance of maintaining calm markets - but there is no indication of exactly how that will be achieved. Meanwhile the levees are breaking.
21. Finally - The point of these threads are not to fearmonger, but merely my share analysis for you to consider in your risk outlook, whether you agree or disagree with the conclusions.

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More from @TheLastBearSta1

22 Sep
🚨🚨 The Argument for a Bank Crisis (9/22/21) πŸ‘‡πŸ‘‡

If contagion in the property sector spreads, and the sector continues its rapid contraction, a Chinese banking crisis is *IMO* is a significant risk if not a probability.
2. The belief that banks are not at risk ignores both huge direct and indirect property exposure as well as the direct warnings of Chinese regulators. Its rooted in the belief of power and desires of central intervention; the same faith that incorrectly assumed an EG bailout.
3. Setting the backdrop, on 12/31/20 Chinese regulators directed domestic banks to limit their property exposure to 40% of their total loan book in order to head off systemic risk, and provided them four years to comply. spglobal.com/marketintellig…
Read 23 tweets
15 Sep
🚨🚨 China Credit - Writing on the Wall - and How to Trade It. (9/15/21)πŸ‘‡πŸ‘‡
2. In June, I described contagion in the Chinese credit as a tail risk - not necessarily a probability, a significant risk that was being underpriced. But now the fuse has been lit and no one is stamping it out. The collapse of the property sector is now a probability.
3. (If you're newer to the saga, I'd encourage you to read this master thread below thread in sequence as it provides necessary pretext. If you're up to date, then jump right in.)
Read 27 tweets
10 Sep
This relates to EG's wealth management product ("WMP") of which 99% of employees are invested in (they are protesting). Some top brass left and were paid out before payments halted. WMPs are a huge funding source for developers. Citizens (who buy apts) are creditors. Disaster.
2. WMPs, which are funded by citizen's savings, totaled $1 TRILLION dollars according to BBG, and regulators are cracking down. bloomberg.com/news/articles/…
3. Reported: Staff of Shenzhen Financial Bureau: β€œWe are not sure if Evergrande Wealth belongs to the Financial Bureau, the China Banking Regulatory Commission, or the People’s Bank of China. It is currently not on our P2P list.”
Read 4 tweets
7 Sep
🚨🚨China Credit Update- Gradually then Suddenly (9/7/21)πŸ‘‡πŸ‘‡
2/ Evergrande is dead. Long live Evergrande. For those paying attention, this has been a forgone conclusion for a while. Now is the critical juncture - what will be done to contain it. The fate of Chinese credit markets and banking sector and hang in the balance.
3/ Contagion is the next step. Contagion is a disease that spreads - its a crowd panic of self preservation. Creditors were forced to take losses on EG and for some it could be fatal. If you're are a lender to property developers you're only concern is saving your own ass.
Read 25 tweets
7 Sep
China Credit Thesis - Master Thread:

(since Twitter is hard to navigate)
Read 10 tweets
30 Aug
BIG PICTURE China Credit Update (8/30/21)πŸ‘‡πŸ‘‡

Since initially warning about China's credit markets in June (an eternity in Twitter years), a lot has developed and so its worth zooming all the way out and re-evaluating the thesis:
2/ Recap: I argued that China's credit markets posed underappreciated risk as a massive growth in debt since the GFC was put strain on the banking system, and that the property sector was the key risk given its size, role in economic growth, and private wealth held in property
3/ This setup is not new, but Beijing's recent push to break moral hazard is. Faith in central invention has been the key to maintaining peaceful markets and therefore the push to break the backstop introduced a critical new risk that could make this episode unlike previous ones
Read 28 tweets

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