I just finished listening to the always excellent Odd Lots podcast with @tracyalloway and @TheStalwart - this time about the macroeconomic implications of the Evergrande situation with @michaelxpettis.

A great listen. Worth your time.

Professor Pettis lays it out quite cleanly, noting (in an opinion I agree with) that Evergrande did not start the fire, and that the overarching policy aims meant this was going to happen at some point. Evergrande is the poster-child because of its presence in USD debt markets
but the situation is following the model of previous cleanups starting a few years ago (Professor Pettis mentions Baoshang Bank as one model (tho I prefer HNA as the model because it will likely be a local govt-organised restructure rather than a regulator-driven restructure))
and the larger issue is really about the impact of the overarching policy on the economy. If excess speculation in real estate is largely dampened, that will reduce the amount of savings applied to "low quality GDP growth", leading to lower nominal growth, which causes the
imbalance to be re-directed to other places.

As he points out, the potential size of the 'escape valve' allowing deflation of this particular balloon is small compared to the problem, to a great extent because as he notes, there are no good solutions, just bad or worse.
Adding a few comments...
1) One of the really interesting aspects of Chinese households having so much of their household wealth in residential real estate is that the NPV of the asset is partly high because there is relatively little friction. In many other countries, property
taxes and maintenance and insurance (especially of single family homes) present a meaningful drag, adding an expense of a couple percent per year against the value. With so much of the property market being newbuild multifamily (which presumably means lower maintenance) units,
lacking the drag of property tax, it makes sense that the asset/income multiple be higher. Perhaps not as high as it is, but higher, certainly. The home purchase price is higher because the NPV of the property tax is paid up front in the land purchase premium (where the developer
buys the land). Furthermore, because the developer has to carry the land bank for years, that means debt financing costs to carry that land bank mean breakeven profit levels are quite a bit higher than land purchase cost.

If land were auctioned and property taxes were a known
cost, and the real estate transfer price were post-paid (effectively financed at the local govt's borrowing rate rather than the developer's borrowing rate), all this would lower the upfront cost to a homebuyer. That means, ceteris paribus, less debt, less savings embedded in it,
and lower Day1 home price/income multiples. Of course, property tax just means the drag is added to future household income rather than accumulated savings.

One way for the transition to be made would be for LGs to start charging property tax (leasehold payments / "land rates")
on newbuilds while allowing existing owners (who paid a higher price on the land upfront) to "earn out" their property tax through the end of the lease. Then, when they renew the lease, they start paying property tax.

This would allow a dual secondary market where some property
trades with a leasehold payment obligation, and some trades with no obligation til end of lease.

This would effectively allow the secondary market to become more relevant compared to newbuild (natural now that a lot more of the cumulative housing stock is recent), and it would
anchor the secondary market price to an NPV which could be calculated based on a homebuyer's own borrowing cost. And it would mean LGs have to earn less from land sales because they are getting a stream of PT payments going forward.

2) resi real estate and CRE can be bifurcated
and stay that way for decades. CRE is eventually covered in consumption as consumers pay the seller's costs in the product price. Something which reduces the speculative element in resi markets need not kill off CRE. Yet.

3) Michael Pettis noted 5 ways for the imbalances to
resolve themselves, pointing at increasing the trade surplus as one possibly unpalatable way of allocating capital from bad productivity to better productivity endeavours. MP points out that trade partners are unlikely to be excited by a larger trade surplus. I'd argue another
version of this could include currency depreciation, which would effectively reduce the dollar value of nominal wealth, debt, and household income, but because right now China is effectively insulated because the trade surplus is what it is, but the household sector isn't
exporting savings through travel and the corporate sector is not exporting savings through foreign asset purchases, those who would get hit are companies with significant foreign currency debt (like property devcos), which, surprise surprise, are already getting hit hard.
While I have not been a proponent of a sudden devaluation, it would be a way to create nominal inflation with real world default against foreign investors AND against the populace (through declining value of household RMB wealth as denominated in global currency). The trick is in
managing the disappointment which will come when the nominal real estate price does not grow with other inflation. In Japan from the early 1990s onward, purchasing a home was better than renting because the monthly payment was slightly lower and rates would reset lower as
long-term rates fell. But it was "homes are not for speculation but for living in" because home prices just didn't go up.

Japan had a lost decade (or two) but came out of it remarkably well. Banks had to be recapitalised. And the central govt effectively took the load through
increased central govt debt, kicking the can very far down the road, but it created credible long-term fiscal irresponsibility which would be softened through the fact that savings assets (in Japan, home ownership, life insurance, and prodigious amounts of bank deposits) earned
very low income for years. That was the effective default vs expectations as far as a generation (or two) of Japanese people were concerned.

I expect China may find itself in the same boat. It may be uncomfortable given China's image of its future self but as a well-known
Japanese saying goes, perhaps "it can't be helped."

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More from @travislundyasia

11 Oct
On Evergrande $3333.HK, I remain surprised we haven’t seen more commentary today about the Jumbo Fortune bond which matured 3 Oct.

It’s a privately-issued USD bond with guarantee by Evergrande, apparently. I say ‘apparently’ because the prospectus is not public.

The stories
out a couple weeks ago suggested there was no grace period (though it matured on a Sunday so wouldn’t pay til Monday) but the bondholders would extend a 5-day grace period.

That 5-day grace period ends today (assuming HK calendar).
Otherwise there are more coupons due today (with another 30-day grace period starting), then another later, but the Sep23 coupon 30d grace period ends 23 Oct.

If there is no news on Jumbo Fortune imminently one can presume either it was paid or renegotiated or the BHers
Read 11 tweets
28 Sep
Reuters: SOE developers and local govts asked to step in to buy Evergrande assets.

This has been my central theorem for a "market-oriented approach" solution.

Avoid direct state intervention. Get state govts to supply slightly senior/pref equity.

Get quasi-private sector involved to manage project completion with effective credit enhancement to projects. Get some cash into projects to complete them, possibly to push some equity back to Hengda.

Allow Hengda to wind itself down slowly through debt repayment.
It may not happen quickly enough for everyone, but 'progress' which looks like the right people (those who got rich) are suffering pain and the right people(those who bought flats) are being prioritised would go some way to mollify the crowds.
Read 4 tweets
22 Sep
A short follow-up on Evergrande ($3333 HK)

Thanks to all for listening to the podcast with @TheStalwart and @tracyalloway.

First, some housekeeping:

The podcast is here (or on Apple podcasts, or Spotify): bloomberg.com/news/articles/…

The transcript here: bloomberg.com/news/articles/…
Since we recorded that, there have been any number of news stories and developments covered in the SCMP, the FT, WSJ, NYT, and more. They have been informed and relevant.

There have been a few threads by @michaelxpettis and commentary by @niubi well worth reading.
There has been recent news which deserves a bit more nuanced treatment because it looks, as of today, we may be getting a resolution sooner rather than later, which is only a little surprising.

Development #1: Sep contract sales have, it appears, fallen through the floor.
Read 32 tweets
29 Dec 20
Year-End Comments from An Independent Analyst (Thread)

1) Buy side does not make sufficient use of external expertise.

I publish research on events, special sits, catalyst-driven situations (which will include fundamentals) on @smartkarma and I note lots of HFs and LOs
(2/n) which do "fundamental" (whether "growth" or "value" biased) ignore the alpha available from special sits. They may not "do risk arb" but when a situation shows up on a portfolio name, they should understand how to best exit/play. They tend to think proprietary info about
(3/n) how/why they got IN for fundamental reasons gives them an edge on the non-predicted special sit. That's wrong.

The entire job of special sits players is to make money because others (those who do not respect the special sit) decide to trade at the "wrong price."
Read 16 tweets
28 Dec 20
Looking Inside the Diaper.

On 30 May 2019, I wrote about Sanyo Chemical (4471 JP) and Nippon Shokubai (4114 JP) as a Guess-The-Ratio trade. I liked both companies, but one wanted to buy Sanyo Chem cheap (1/n)

(2/n) I recommended trading the range, buying the 4471/4114 ratio at 0.75 and possibly shorting it at 0.95.
(3/n): The summer passed and Sanyo Chem underperformed despite being cheaper, but as also noted in the first insight, Silchester was building a position in Shokubai. When it got to 0.75 in July 2019, that was time to buy.

Nippon Shokubai downgraded its forecast at end-Jul2019
Read 10 tweets
18 Nov 20
The Nikkei 225 is a weird and whacky index.

Locally it is sometimes referred to as the "Nikkei Dow" because it is price-weighted, like the Dow Jones Industrial Average.

Started many decades ago, the index was started by taking 225 stocks, adding up all the prices, and then
dividing by a DIVISOR to get to the index level on Day 1.

A stock's weight was price divided by the sum.

When one stock is taken out and replaced with another, you change the divisor on that day to make it the same as it would have been had the stock going out remained in.
All this was fine until Japan changed its Companies Act and decided that when a new company was formed, each share had a par value of ¥500 rather than the longtime value of ¥50.

That meant when a stock listed, it had fewer shares outstanding but a higher price. That meant the
Read 22 tweets

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