Thread by @AnandableAnand

China’s credit market: as crisis unfolds #Evergrande

From 2008 onwards, to match projected GDP numbers of 10%,

china made 300 cities which are loosely called ghost cities of china

Video of Al Jazeera Is from 2009,

This growth of GDP was fuelled buy Chinese PSUs and state govts taking loans to complete these projects

These loans were short tenor loans with frequent refinancing. This was done to keep a tight control over their finances and operations without letting the credit risk spread

Later majority of these corporations floated bonds which also had implicit (important word) guarantee by the CCP (party)

Most such investments in a command economy are not productive, but who cares till GDP numbers look good and outside investors are in awe.

CCP had long understood the dangers of such unsustainable levels of debt and tried to cool down the real estate market at least twice in last ten years

This was in 2013

forbes.com/sites/kenrapoz…

Make no mistake, this entire Evergrande saga and events preceding to that, have been engineered by CCP, just that this time scope and magnitude is too big and no one knows the domino effect

Early this year, they increased credit assessment and requirements for property developers and other bigger buyer in the market, which led to plummeting sales of properties

In 2019, they let Baosheng fail - the first time a big bank had failed in 20 years, by late 2020, several PSUs began defaulting at unprecedented rate - signalling that the implicit guarantee was not so much of guarantee for PSUs

All such PSU bonds started trading at a heavy discount

PSUs (with $331bn due to refi this year) started defaulting of local bonds in 2020, lifting their share of onshore payment failures to 57% from 8.5% a year earlier. The figure jumped to 72% in the first quarter of 2021

Beijing has signalled that it wants both onshore and offshore investors to take a haircut in the restructuring,

causing both onshore and local bonds to trade at steep discounts today. Critically, bonds are seeing huge haircuts in onshore repo markets

Given the way all Chinese bonds are trading and the way HangSeng is falling for many days in a row,
Its impact on global equity is bound to be there

Similarity with Lehaman Crisis is striking. Lehman was also consciously allowed to fail over repo by state actors,

Unless Chinese govt gives full guarantee to all the bond rollovers due this year, or at least majority of it,

none of the players in the arena will be able to raise fresh capital leading to dominos of collapse

Evergrande debt is around USD 600 Billion and its bond is trading at steep discount, with default already triggered

Though the amount looks large on paper, but it’s a small change for Chinese Govt

On the other hand, the way swift crack down is being done in tech companies, Crypto and in credit market in general, imho, they will allow series of big firms to fail

It can also be part of power play within CCP as many politicians have vested interest in these companies and/or their bonds

So what will happen now after a total collapse of Evergrande?

Chinese banks have huge exposure in the property sector. Huge part of middle class wealth is tied up to either property or property related bonds.

So far, constant buying of property has provided funding to garden variety of local bodies and state owned firms

As lending to the sector as well as new sales comes to a complete halt, it will lead to many more failures similar to Evergrande

Any kind of bubble has been long written off by both investors and analysts just because bubble has existed for 10 plus years inspite of govt trying to burst it twice in the past

Failure of property developers and investor will destroy the entire ecosystem around the property starting from vendors to contractors to even govt owned agencies

Which will lead to both price and time correction world markets, may be with a lag

That’s why its just the start and 10-20% correction in equity has to be priced in by the market sooner than later

This thread sounded pretty hot in my mind, but didnt get any traction from my audience

Never-mind

I should stick to memes 🙈🙈🙈😅😅😅😂😂