Thread by @bauhiniacapital

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven I had to right-click to open the Burry tweet and then the other opened. I followed Carlo, he blocked me for no reason I know, unblocked me, but then soft-blocked I guess. Don't know that I am missing much.

He got the policy part right.

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven But so did "most analysis" which talked about the policy change a year ago, or even well longer.

The PBOC in Nov 2018 in its Financial Stability Report singled out Evergrande, Fosun, HNA, Tomorrow Group as companies which control multiple financial intermediaries as well as

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven presenting systemic risk, and promised tighter oversight.
HNA was later taken over by the govt. Tomorrow Holdings (that is a story to read) was already on its way to govt takeover. Fosun unwound a bunch of stuff.

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven Evergrande had the heads up. They said in 2017 they intended to lower debt. But they didn't, then there were tighter restrictions on sales, law changes on pre-sales, etc, and in spring 2020 Chairman Hui said they would lower interest-bearing debt by RMB 450bn over 3yrs.

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven But the market knew in 2018. The PBOC report came out on the 2nd of Nov. There weren't many headlines until a couple days later. And they priced 5yr USD bonds on the 6th of Nov at 13.75%. The market doesn't need a 13.75% yield on dollar bonds in 2018 without there being "issues".

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven The general idea in spring 2020 seemed to have been they would sell more properties and run down land bank (i.e. not replace the land bank for what they were building) which would free up cash allowing lower debt. And they would run lower landbank going forward.

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven But the market ("most analysis") was concentrated on covid and restrictions and the stock fell from HK$22 down to $10. So as they were promising to lower debt, they decided to buy back stock - shares rose 50% in May-June 2020.

https://twitter.com/bauhiniacapital/status/1437743857781796865?s=20

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven Then they popped 40%, possibly on their preliminary unaudited report for June and H1 sales which painted a very pretty picture.

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven And six weeks later they announced a profit warning, saying profits would be down sharply yoy in H1, but were up from H2 the previous year.

The company was clearly trying to raise capital (selling stakes in this and that) at the time, and they promised a huge Sep-Oct sales

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven campaign, but the Three Red Lines of late Aug 2020 changed everything. And analysts saw it. And wrote about it. As did journos.
Evergrande met all three so could not increase interest-bearing debt. Not loans. Not bonds. And the only way Evergrande was going to get out of it

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven was by selling assets. So they did. Slowly. And then they had the Hengda share redemption problem in Sep, denied it was an issue, threatened legal proceedings, issued shares at a discount, bought back shares when they went down further, "resolved" the problem by November, but

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven none of that raised cash. The Hengda Problem resolved meant there was not an mandatory repayment of $20bn in Jan 2021, but it did mean money coming in.

A year ago, that 13.75% (Nov23) USD bond yielded just over 20%. That came down, but by end-2020 it was still yielding ~16%.

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven The company clearly said early in the year it would concentrate hard on paying back debt, and did. It bought back some USD debt, made sure everyone knew "we have the cash" but the bonds never traded materially tighter than 15%, and one can see with the blue annotations on the

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven chart that media and regulatory pressure was heating up - even in April-May. "Most analysis" was probably right. The shares were at HK$14/share on 1 April after 2020 results on 31 March with record revenues and contract sales showed the company still did not meet any of the 3RLs.

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven The company couldn't sell bonds offshore. The company promised to meet the debt/equity red line (and did by end-June), but the PBOC and CBIRC and other regulatory bodies had been nixing loans, and loan rollover, and generally playing a heavy hand.

So he is right about policy.

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven It was multi-faceted, and aimed at all banks (there had been a rule which became more strictly enforced, which said that no more than 40% of a bank's assets could be tied to real estate), but Evergrande was pretty special at the top end of the leverage chain.

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven Where he is not necessarily right is how much of the industry passed those tests. Debt could grow 10% a year if only one Red Line was crossed, and many only hit 1 or 2. If developers reduce assets (by not replacing land bank) but increase debt 10%/yr, they can make a LOT of $$$.

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven The significant problem is that local govts need to raise money by selling land. They want to generate GDP to hit quota by doing development. And the central govt for many years did not seem to be very forgiving of those who did not make GDP quota. So much so that at one point

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven even the central govt top dogs admitted one could not rely upon them. And at one point, the head of the NBS was ousted/punished again (second time in 10yrs that happened). That emphasis changed recently, and onshore studies showed past statistical data had been "wrong" and

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven a few years ago the emphasis on top line diminished and "doing the right thing, correctly" was re-empasized. That, by itself, told a lot of China analysts that things were different.

So was debt a problem? Yes. The PBOC had been cracking down on debt, and real estate, and

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven developers for years, sometimes more draconian, sometimes less. But the thing about developers is that at any time they have a multi-year stream they have to see out. They buy land, hold it a few years, get the permissions, plan the construction logistics, get permission for

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven pre-sales, market it, get pre-sales, and depending on the jurisdiction by that time they either have a glossy pamphlet or up to a third or so of the building built, then they sell, take deposits, and start building more *if they have enough pre-sales* and if not they wait until

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven they do. Then eventually they go higher and higher and eventually get it done, in phases, and the money is taken out of escrow gradually, and proof of cash collection helps fund the next one. But these guys don't run around with lots of cash on hand just to show their finances

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven are safe as houses. And as noted, local govts and homebuyers were all in on it, despite the efforts various regulators, with mixed success, have expended towards trying to ensure that the people don't believe that speculative excess will be guaranteed (cf 2015 stock runup-crash)

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven and this has taken the form of restrictions on who can buy, restrictions on what they can buy, restrictions on financing, restrictions on pricing, etc. This has happened for years, and the constant impression among "most China analysts" is that authorities were trying to produce

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven a glide path which worked for them. The "problem" that "most China analysts" understood was that a huge concentration on real estate was, like in every other country where speculative real estate booms had been allowed to inflate, eventually going to come back to hurt someone.

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven As to the claim there is a "problem that escapes most China analysts" that other sectors, like high tech, are starved of funding, which created "a headwind for a re-balancing towards a more consumption-driven growth", I will disagree in two ways. One, lots of analysts understand

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven that claim (even "most" because the dominance of real estate in the economy is not some dark secret), but "most China analysts" see that with minimal safety net and high apparent inflation, saving for retirement is serious business. So people save. In assets which they see as

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven having growth. So they buy real estate, because it has worked. Bonds worked, but now they yield little. Stocks worked, until they didn't. But real estate has, over time, worked wonders. So buying it with leverage has been seen by households as great.

The problem with consumption

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven is that if they are not saving through their ownership of a second home - which they might give to their kids, or rent out, or sell to fund their old age - they will have no money. No safety net or confidence there will be one means people save rather than spend. That's it.

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven As to real estate starving high tech of funding? I think not. Serious high tech - physical or intellectual property - gets funding. It gets co-investment. It gets a lot of support. The problem really is that development to catch up to the west in some areas is really hard.

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven And ventures - even in areas where the govt allocates special attention, like semiconductors - hit roadbumps (cf Unigroup, others) and it would be inappropriate for a safety-net-lacking savings-driven populace to plant their savings into venture equity without proven product.

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven This angle of "capital starvation because no consumption" is just wrong. And "most China analysts" see that too.

As to the end where he speaks of - that China is reining in the sector - not wanting consumers to go bust nor wanting a "rogue sector" to balloon further...

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven "most China analysts" get that, and it is in their model.

"Most China analysts" is not the same as ill-informed tourist twitter posters, even if the latter get far more attention (and "most China analysts" are not quite as public with their opinion as most twitter posters).

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven As to "the last level of pernicious contagion will come from the losses all unsuspecting US moms and pops will incur following years of reckless inflows", I think if one were to count those assets as a percentage of assets of US moms and pops, one would find it is not likely to

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven be a "last level of pernicious contagion."

As to iron ore, etc, yes. That has been on "most China analysts'" radar for.... wait for it.... years. And more years. That's what happens when big thematic cycles turn.

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven And as to "contagion to the rest of the HY", yeah... it's pretty much real estate developers.

I don't have the data on that index, but standard China HY indices are basically real estate (73.68% on ABBI - the month before it was higher).

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven The thing about "contagion" is that it is self-fulfilling and self-reinforcing. It is mostly "proven" in real-time by observing external-to-the-company price indicators. Like the price of USD bonds in this case. Price is a behavioural and analytical derivative of how outsiders

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven view THEIR risk. Which is price risk. And a lot of people have somewhat low tolerance for path risk pain. Even if someone thinks R&F will be fine in the end, they can't afford to ride down 50% then ride back up 120% to earn 10%. So they sell. But if others are seeing it, the bid

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven disappears, etc. "Contagion" is really the result of a crowd-price model of something having reached a tipping point. The question now is whether China regulators care about the offshore bond prices and HK share prices of tycoon-run property developers. My gut is... not much.

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven The PBOC and Financial Stability and Development Committee (金融稳定发展委员会) called Evergrande onto the carpet months ago asking two main things.
1) resolve your debt problems now
2) don't cause system issues.

The systemic issues would be when GOOD companies which SHOULD be

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven able to borrow onshore cannot borrow from banks with real-estate capacity to spare, and, I expect, in not worded but likely understood as explicit - "stop tanking property sale prices which undermine the stability of the rest of the sector just so you can save yourself"

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven So the question people should ultimately ask is what is China willing to tolerate? Would they tolerate a widespread drop in housing prices, the bankruptcy of a bunch of developers (which really means that the capacity just springs up elsewhere (the land exists, the workers exist)

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven after things get cleaned out, and then the sector runs on lower land bank (requiring less debt to carry) and it becomes a build-to-service model (as Vanke this summer basically said was inevitable)? Yeah, maybe. Would they tolerate that EG gets bailed out by state govts because

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven it is TBTF? Not likely. Will they somehow endeavour to save the blameless (contractors as yet unpaid)? Probably. Will they guarantee par on Evergrande-issued WMP which yielded higher than the market? Doesn't seem likely to me. And somewhat uncovered, even by the knowledgeable, is

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven that Evergrande had a marketing niche - selling second properties to savers/speculators. Will it save the second-home speculators' deposits? I'm not hopeful. Will it save those who pulled down an entire mortgage to pay for a thing which is now only partly built?

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven Yeah. I'm thinking a million-plus people expecting homes will be protected a fair bit better than USD bond holders and EG equity holders (and that is without going through the really convoluted waterfall in a BK/restructuring).

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven In the end, only the CCP and the people are TBTF. And "most China analysts" have always known that.

Predicting eventual catchup from epic imbalance is easy, even ahead of time, but ex-ante predicting disaster within a defined finance-able timeframe is really hard.

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven If one had shorted that 13.75% bond the day it was issued, it has paid out well. But not as well as it looks because one has paid out 40% in notional in cumulative coupon and still more in borrow fee. That has eaten half the chart from par to here. And volatility is high,

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven and liquidity is sometimes a problem. I know people who have been recalled, and they end up buying the bonds back 5-10pts higher than when recalled. The hero trade has only recently paid off despite it being "obvious" to "most China analysts". And hindsight is, obviously, 20/20.

@coloradotravis @DereckCoatney @MarketsPuke @FinanceLancelot @INArteCarloDoss @MetreSteven Note: they got a huge Sep-Oct sales campaign result, but had to discount heavily, and didn't get as much as they wanted to, so even then, people were starting to predict the outcome would not be as rosy as optimists would have liked.