Thread by @hendry_hugh

Evergrande is this week's FinTwit Dopamine, less credit expansion and global gdp growth will be its legacy...

Invigorated fascist regime intent on rolling back capitalism, hammers its best wealth creation engines, outlaws credit scoring and now has to ponder whether to sacrifice its absurd GDP growth targets as they deal with an over indebted property sector. I'm loving their quandary.

Do they continue to purge capitalism (beat the winners) and bail out the property sector (support the losers) all paid for in ordinary Joe wages that seem too low. Is a losers' bail the ultimate rejection of the free-market system? Puff on that Xi...and your Princes of the Yuan.

The GOV will bail, of course they will, they're just loving the suspense of keeping us guessing and I bet they're already lathered up by the orgasmic exaltation of their omnipotence that a bail will surely reveal...skip to my final comments

Except, I'm not sure that a bail now can avoid a permanent "2008" style loss of GDP? The entire Chinese property sector gig is based on apportioning zero credit risk to a v risky undertaking. Leaving ordinary people to underwriting the risks of the big guys, 'tis always the way.

So the pertinent question is - after they bail - will private sector agents immediately adopt their previous zero credit risk analysis? If not then a permanent loss of GDP is coming. Perversely this would be good for wealth creation but that's for another time or revolution...

All I'll say is that the present system creates GDP growth at the expense of wealth except for the winner takes all tech ecosystems and we all know what's happened to them..#FreeJack

Remember, it wasn't the Fed raising rates 2004-06 that crashed the global bank crash in 2008. NOPE. It was private banks - actually it was JPM - reassessing their credit risk model. That did it in for LEH, and ushered in more than a decade of lean gdp growth in the West

The parallels are eerily similar. US credit gushed because lending risk was assumed zero. Remember all those Michelin Stars awarded to junk MBS?? And credit booms create gdp growth. And Chinese property debt is nothing more than a MBS backed by the Chinese state...oh shit

And Local Gov Fin Vehicles - $8.4 T ! They're practically gilt edged securities owing to those recurring land sales and the implicit government bail. I bet you could probably dump a ton of them at the primary dealers' collateral window and get a good fist of new credit.

I don't subscribe to the house of cards / everything crazy o/valued rhetoric of Fin Media. Mkts kind of close to right - imo - good collateral has replaced gold or fiat currency as base money and since the aforementioned crisis of 2008 there's been a shortage of good collateral.

Riskless and therefore scarce collateral has become priceless, and everything else, because it's useless as collateral, has probably become undervalued. Altho I hate that term. I was schooled to think, lowly rated. That's a term that'll keep you out of trouble.

Anyways...obviously riskless assets are rather short in supply. And with little to feed into the collateral / alchemy machine of loan creation, there's been damp credit creation since 2008 everywhere except that is for China.

It's why Fed lies about printing money. Modern credit system has no use for bank reserves. Try handing a DJ your favourite track on a cassette next time you're at a club. Bank reserves are not accepted as collateral. QE is not the solution. Modern credit creation needs collateral

Now if you got good collateral then the world's your oyster my boy ! But it has to be thought of as riskless. US T Bills...hell yeah! Gold...sure, Good, liquid corp debt ...why not, we'll give it a shot...and when fannies are really up they might even accept FANG type stocks ...

I'm talking of course about the dark web of the offshore eurodollar market. That's where huge dealer banks daily go into each new day offering new credit, lines, provided you can post sound collateral that is.

I bet they probably accepted all the $ quoted Chinese LGFV paper as collateral to support other risky ventures in the Chinese swamp. That, and for sure, the + $200 B in China prop dev debt...that was long ago pledged in the collateral window for another go on the credit carousel

So to get at the meat of it, the bail or no bail story hinges on the intangible forces of speculation - will the huge dealer banks reconsider their credit analysis like JPM did over the summer of 2008? Has property debt and that ocean of LGFV paper lost its riskless monicker?

Only that will determine whether China suffers a loss of permanent gdp. And I'm foolish enough to say that it's unavoidable. China's banks are gonna run short of $ collateral to post at upcoming windows. So let's watch as the PBoC slashes the amount banks need hold in reserve

Fat lot of good that will do. Fin-tech sounded a great idea until the state killed it...#FreeJack...and so its back to the remedy of the ordinary bloke taking another hit - Wealth Management and yuan per capita wages are gonna get hosed again.

What's the play you dope junkies screech. I bet there's a cunning fx/fixed income trade. $ liquidity is getting squeaky tight. The impulse is CNH weakens. 7.50 strikes ? I'd need to price up and only when the dope release unwinds. Problem is that fx has always been managed cheap

Makes me think PBoC managed FX and bank lending conscious not to repeat the Nikkei bubble. Where did it get them? Both flared to around 17pc of world GDP and bubbles ? Hard to say that the Chinese avoided asset bubbles. Asian philosophies seem fickle and destined to be rejected.

The BoJ came to reject bank expansion exhortations as it became disgusted by the gains of the noveau riches. They tightened monetary policy in a devastating manner. And China and its new common prosperity rhetoric sounds like the second coming of the Princes of the Ye(UA)n...

Markets pursue Disney outcomes right until the end... take your time or you're never gonna make it...Evergrande is clickbait. Change, even momentous, travels slow. Hell, Wells Fargo peaked (!) only weeks before LEH collapsed. Vicarious happiness bumps prevail until they don't.

Chuckle don't gloat when the FT quotes experts saying that unless regulators seriously mismanage it, a systemic crisis in China is unlikely. Sigh when they publish BIG asset managers telling you how better placed China is via RoW. And copiously study global deflationary trades.

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