Post-Evergrande: China's Waterfall of Pain

China itself is one big Evergrande.
One big debt crisis.

For years massively over-levered shadow banks masqueraded as propcos, got drunk on credit, flirted w/ default & called for bailout like a late-night uber.

Contagion has begun
1/ How Evergrande is Actually a (Shadow) Bank

On the surface Evergrande is a propco. It has insatiable demand for capital cuz it needs to buy land. That's what propcos do.

But then Evergrande started stuffing its commercial paper into WMPs & selling it off to its own employees.
Let's be more explicit.

In June 2019, Evergrande plowed 13.2B¥ into Shengjing Bank, acquiring 36% stake in a literal lender.
Shengjing was on the brink of default. Tier 1 capital adequacy ratio was 8.52%, barely above regulatory req.

Now why would a propco bail out a bank? 🤔
2/ China's Other Fantastical Bank Bailouts

Evergrande's story is big. But it's barely new news.

In May 2019 China’s central bank announced its 1st bank takeover in 20 years: Baoshang.
Creditors were to take a hit, assets would be sold and an example set for governance.
And then there was Bank of Jinzhou.

In March 2020, the PBoC poured another 12B¥ into Jinzhou as Tier 1 capital adequacy fell to 5.14%. Two quasi state-controlled investors were said to have seized 44.34% in the troubled lender.…
... And Bank of Gansu.

In July 2020, a state-backed provincial highway operator stepped in as the largest shareholder, but was dealing with its own balance sheet issues. Months later the company announced a 167.3B¥ refinancing to deal with debts on 37 government toll roads.
Oh, and then there was Huarong.…
And don't forget HNA.

HNA was an "airport."
The way Evergrande is a "property company."…
3/ Who's next?

It kinda feels like trick-or-treating. Like Chinese financial institutions just gotta stick out their hand and the big brother rushes in with backstop.
4/ Where does all that bailout money come from?

In America we say "money printer go brr."
In China we say "money printer go BRRRRRRRRRR."

Xi's QE has been making a farce out of JPow since 2008. 👇
Is it sustainable?
5/ What about the whole real estate sector?

TLDR: this could snowball fast.

China's top 200 property companies currently hold >$5.5 TRILLION in assets at 8x leverage.

If Evergrande catalyzes even a 15% decline in prices across the board, much of the industry becomes insolvent.
Graph (left) shows the asset/liabilities ratio for 10 other propcos besides Evergrande. Note: they're all less than 1, which means shareholder's equity is negative- including Greenland, Sunac, Vanke, Country Garden...

Chart (right) shows the top 15 worst propcos in the world.
6/ What is the CCP gonna do now?

China is incentivized to let Evergrande collapse while minimizing shakeup in the rest of its property market.

So far the CCP made its goals pretty clear: pro stability & deleveraging; anti speculation.

7/ But is all of this... systemic?

According to macro expert @ABCampbell, "for a credit issue to get systematic, it has to go through the banking system, in particular the biggest and least stable"

Here they are. China's worst banks.
(its "Waterfall of Pain")

Let's wait & see.
Most of the data and images from this thread come from @rosetechnology_.

Check them out for more primary source data & visuals as the China debt crisis continues to unfold.

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More from @FabiusMercurius

18 Sep
🇨🇳Evergrande's Backstory🇨🇳

🌎 The world demands answers.

From Fortune 500 to 1.95 Trillion in debt: How did China's #2 real estate giant get to this point?

How much cash does it *actually* have?
Will there be a bailout?
Who's gonna get f*cked?

Here goes. Story time.
1/ First, how bad is the current situation?

There's not much info on Evergrande's finances on the Western web (aka Google) so I had to dig through the Chinese web (aka Baidu).

This poster shows China's top 3 most indebted real estate co's in 2020:

#1 is Evergrande (@ 1.95T ¥!) #2 is Country Garden #3 is Vanke
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Imagine ur in HR.
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[code @ end of 🧵]
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