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19 Sep, 4 tweets, 2 min read
1/4
 Even as the chairman was proclaiming that a basic principle of his business is that cash is king, he was pulling cash out of the company. According to WSJ: "As it piled on debt, Evergrande paid out billions in dividends to...
wsj.com/articles/how-b… via @WSJ
2/4
 stockholders, with most of that cash going to Mr. Hui as its largest shareholder. The payouts helped him become one of China’s richest men. He has received more than 34 billion yuan, the equivalent of $5.3 billion, in dividends since October 2018."
3/4
 Someone must have know that this was problematic because, at the same time, Evergrande was doing everything possible to raise cash, not just from banks, but also from employees through wealth management products, from customers through pre-purchases and deposits, and from...
4/4
 suppliers and contractors by paying them in commercial paper. If you have to leverage itself to the hilt — often with very expensive financing — just to keep operating, it isn't a good idea to pay large dividends unless there is, to put it politely, an information asymmetry.

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Michael Pettis Profile picture
20 Sep
1/4
 Another useful article by Zhou Xin. Among other things he estimates that Evergrande's on- and off-balance sheet obligations may amount to as much as 3% of China's annual GDP. That's a lot of debt.
scmp.com/economy/china-… via @scmpnews
2/4
 But none of this is new. Many of us have know for years (some of us for over a decade) that the property-development sector was creating a very serious imbalance in the Chinese economy, and this includes a number of regulators and policy advisors.
3/4
 So why didn't Beijing act sooner to reverse the problem? Perhaps because, as Albert Hirschman used to point out, the constituencies that benefit disproportionately from unbalanced growth are often powerful enough politically to block attempts to reverse these imbalances.
Read 4 tweets
Michael Pettis Profile picture
20 Sep
1/9
 The idea that more efficiency in financial markets is by definition a good thing is based on an unrealistic model of financial markets in which the only thing that drives capital is a search for productive investment in the real economy.
ft.com/content/983bc6…
2/9
 If markets are inefficient enough – i.e. frictional costs high enough – to distort the flow of capital to its most productive use in the real economy, then it makes sense to implement policies that lower fictional costs. This can only improve the capital allocation mechanism.
3/9
 But at a certain point frictional costs become so low that they have almost no impact on the way capital is allocated to productive investment. In that case, lowering frictional costs further only benefits speculative, high-turnover capital and the derivatives market.
Read 9 tweets
Michael Pettis Profile picture
20 Sep
1/5
 Very interesting article on the range of problems Evergrande has faced in recent months and years. I didn't realize that already 3-4 years ago the commercial paper that Evergrande used to pay suppliers and contractors was being discounted at 15-20%.
caixinglobal.com/2021-09-20/cov…
2/5
 That should have been a warning that the company was already facing a serious liquidity squeeze, or else why implicitly borrow at such astonishingly high rates? And yet, at the time, Evergrande was also paying large dividends to its shareholders.
3/5
 Of course, as this article notes, Evergrande's problems are also problems for China's economy: "Its liabilities are equivalent to about 2% of China’s GDP. It has more than 200,000 employees, who themselves and many of their families have invested billions of yuan in...
Read 5 tweets
Michael Pettis Profile picture
17 Sep
1/4
 "Current estimates put the size of the capital injection Huarong needs at around 100 billion yuan. Citic Group will provide the lion’s share of the funds, between 20 billion yuan and 50 billion yuan, most likely raised through bond issuance."

caixinglobal.com/2021-09-16/hua…
2/4
 Now that Huarong's intervention has been completed and it is in the process of recapitalization, it's easy to forget about it, but the ways in which the authorities dispose of Huarong's assets will tell us something about how future large insolvencies will be treated.
3/4
 For now they seem to be moving quickly to liquidate assets, which is a very good thing, although it is not clear if these will be sold at clearing prices or whether there will be pressure on buyers to pay whatever amount Huarong needs to be remain technically solvent.
Read 4 tweets
Michael Pettis Profile picture
16 Sep
1/7
 This is an interesting problem for central banking geeks. Many of China Evergrande's suppliers, who were paid not with cash but with Evergrande commercial paper (CP), are now finding it hard to get paid, and so are worried about their own...

reuters.com/business/china…
2/7
 solvency and liquidity: "The plight of Wu and many others like him has thrown a spotlight on the extensive use of CP in China's property sector. Developers favour it as they prefer to not pay upfront and because it doesn't count as interest-bearing debt."
3/7
 This is an obvious problem for Evergrande's suppliers, who might not be paid after having delivered products, but, as I plan to explain in my central bank seminar tomorrow, it is in fact also a monetary problem. As long as CP from large property developers was...
Read 7 tweets
Michael Pettis Profile picture
16 Sep
1/4
 Very useful thread. I think the most important point is this: "You will never make a loss if you never acknowledge the expense of malinvestment - i.e. if you never write anything off. If you don't expense your losses, they show up as assets on your B/S."
2/4
 This is something economists (but not traders) seem to have real trouble understanding and incorporating into their growth models. Losses should always be expensed, and so should reduce income and wealth, but when they are instead capitalized, they show up as...
3/4
 higher income and wealth than is economically justified. A company (or country) that systematically capitalizes its losses will seem to grow faster than one that doesn't and will show higher levels of net equity, but that growth and those assets are fictitious.
Read 4 tweets

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