Thread by @APhilosophae

Last week I said I thought this would happen on Monday. I was a bit early. This is a story to continue following.

https://twitter.com/disclosetv/status/1468880166487273474

Expectations: China cuts things by half, meaning realtors and their industry get pushed out to reduce costs, a cap on prices gets initiated, and you see property listed at 0.5x to push fluidity back into the market.

This is possible in a top down economy like China's, though admittedly difficult. Expect this to play out through most of 22'.

What is worth noting here is that most of Evergrande's positions (Loans) are in dollars. Not uncommon. Borrowers get lower interest rates because they assume the exchange rate risk themselves. If that bet goes bad however the borrower faces higher costs to service the debt.

Here is the obvious not so obvious thing about dollar bonds in Beijing. Even if the national government in China were to intervene, those dollars can't be printed by Beijing. They have to come from elsewhere.

So, what happens? If you want to service that dollar debt you have to raise dollars. This can be done by selling dollar-denominated assets (US Stocks and bonds). This mean pressure in China can spill over into the US economy and all dollar...

backed economies through forced asset sales of dollar-denominated assets. This is part of that whole Contagion idea.

Organizations around the world have taken substantial short positions on the US dollar. As those loans come due, dollar assets are sold. Which drives the dollar higher. Which makes the dollar loans even more unsustainable. And so on. And so on. And so on.

If this ripple effect or Contagion becomes substantial enough to really lay into the US economy, or even work against the international understanding that dollar-backed assets are safe then the US Fed could potentially step in here.

During height of the 08' financial crisis the Fed Reserve opened a currency swap facility with the Swiss National Bank and the ECB ultimately capped at $620 billion, with the express purpose of allowing the other central banks to bail out banks domiciled in their jurisdictions.

So, with the cooperation of the Fed, it is possible for China to print dollars in a weird sense. The big question here is does the Fed bail out China to prevent a stock market collapse in the US?

This would be political suicide. So, expect the backdoor of backdoor options and near zero media coverage if it does happen. The Federal Reserve just may bail out China. The only question is how they will do it and will the public catch them doing it?

Here we would likely get a true short squeeze. Since the dollar is the global reserve and globally people hold debt in dollars means the more dollar-denominated debt there is in the world the more demand there is for dollars.

Thats because borrowers need dollars to service their dollar-denominated debts. That can push up the value of the dollar and further hurt dollar borrowers. This is the short squeeze.

All nations, and emerging markets especially, try to offset this dollar short risk by holding foreign-exchange reserves, primarily in the form of dollars. That way, they have both liabilities and assets denominated in dollars, so that their dollar-denominated assets can be...

used to support their dollar-denominated liabilities if need be. Historically, central banks tend to accumulate dollar-denominated treasuries during weak-dollar periods, and hold them steady or sell them to defend their currency when the dollar is strong.

It will be interesting to see what the Fed does and how this plays out. 2022 will be one hell of a year.

If need be, this type of action is what I am talking about when saying China could essentially print dollars to inject into their economy. The Fed has set up these swap facilities before, this may be a large enough issue to warrant this move again.
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