China’s slow motion financial crisis


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good morning. Yesterday’s US market was only a bit shaken after Wednesday’s Fed had a really meaningful meltdown, so we thought it would be breathtaking and went on to look at a more global story. Contact us by email: and

China’s slow motion financial crisis

For most of last year, the biggest financial story was China’s real estate debt crisis — until the collapse of Evergrande was pushed out of the cover by a global inflation panic. Still, Evergrande remains a huge and moving story.

The latest sub-chapter was rolled out this week when another major Chinese developer, Shimao Group Holdings, unit defaulted on a loan from China Credit Trust Co. This year Shimao’s dollar bonds went from $ 71 to $ 48.

Another developer, Guangzhou R & F Property, said it could miss repayments next week. The bond, which had already been traded at a fraction of the par, was hit hard again. If you thought all the bad news about real estate in China was priced, you were wrong. We are still looking for the bottom.

The impact of this slow motion crisis was yesterday FT Big Lead By Sun Yu and Tom Mitchell. But very generally, this is what happened:

  • Over the years, the growth of China’s real estate sector has become increasingly dependent on more debt.

  • Authorities have decided to limit the debt of real estate developers (most notably setting a “three red lines” in August 2020).

  • Debt limits not only pushed Evergrande to default, but also forced all developers to rely heavily on real estate sales for cash.

  • But real estate sales are slowing-perhaps because of the loss of trust due to the collapse of Evergrande-other developers are approaching default as well.

  • Infrastructure spending is also declining. This is largely funded by the sale of land to local government (now bankrupt) developers.

This is Caixin report About yesterday’s decline in real estate sales:

New home sales by China’s top 100 real estate developers fell 3.5% in 2021 to RMB 11.1 trillion ($ 1.8 trillion).

According to CRIC, the real estate market has not bottomed out yet and is entering a stage of zero growth. Policies to limit funding will be slightly relaxed in 2022, but the short-term outlook is not promising, he said.

A 3.5% drop in sales may sound like a good thing, but debt amplifies the impact of lost revenue. And, as we all have learned over the past year, real estate is a huge part of the Chinese economy.Consensus (for example, as explained here) Means that capital investment accounts for more than 40% of the country’s GDP, with public and private construction projects accounting for about two-thirds. In addition, as about 70% of household assets are tied to real estate, a decline in the value of real estate can adversely affect asset effectiveness.

It’s not possible to accurately estimate what this means for economic growth, but it’s not good. Craig Botham, Chief China Economist at Pantheon Macroeconomics, states that China’s 6% or 7% growth era is “forever gone.” The new target is 5%. This is necessary to achieve Xi Jinping’s goal of doubling the economy between 2020 and 2035. He says.

Judging from the formal and semi-formal response to the Evergrande crisis, more debt is a good forecast. The response, as far as I know, consisted of finding a way to smuggle new debt into the system.

The slight slack in the reserve requirement ratio is the least of them.There are restrictions on the issuance of developer bonds relief..How to raise funds for state-owned local governments hold Developer of Real estate auction..Published by the developer Commercial paper To avoid the “red line” debt limit. As detailed in Yu / Mitchell Big Read, the most striking thing seems to be that the local government was handed a job to help the creditors of the broken developer and confirmed that the construction project was completed.

Local political parties and government officials are also complaining that they, not their bosses in Beijing, must step on increasingly expensive legislation due to the collapse of the Evergrande. “This responsibility ultimately lies with the local government,” said Wei He, an analyst at Gavekal Dragonomics in Beijing, when central government officials have to hand over all prepaid homes to nervous buyers. .. In Huaihua, a small city in Hunan, the City Finance Department recently financed Evergrande’s local subsidiary, Rmb50m, to help complete the project, according to someone familiar with the developer’s business. ..

In another city in Hunan, Shaoyang, local officials are trying to auction the Evergrande issue. On December 24, they announced that they would sell four projects of developers in their jurisdiction. “Neither the government nor the evergrande have money,” a local official told FT. “Someone else needs to fill the vacuum.”

This is a long way from an orderly and transparent clearing process where creditor orders are established and losses are allocated. Instead, it looks like an improvisational effort to kick the can, and no one seems to have suffered a big loss, except for offshore bondholders.

How important are all of these to investors around the world? It is difficult to know who will incur the inevitable loss, as Chinese authorities later chose ambiguity and pain over transparency and pain.

But one point from the Pantheon Bossam is worth remembering. The cyclical supply of credit in China, the so-called “credit impulse,” or debt contribution to GDP, has been tightened for over a year. Many observers expect credit easing to help the Chinese economy recover. But unconventional credit is already flowing, and all they’re doing is filling the balance sheet holes left by the collapse of Evergrande, creating new capacity and production. There is none.

More debt may buy China more time, but it doesn’t grow it much.

Kazakh politics is an investor issue

The protests that struck Kazakhstan drew the world’s attention to the frontier markets of Central Asia.Don’t pretend to be an expert domestic also global Politics. However, we investigated the impact on the market.

One of the important markets for Kazakhstan is uranium, with the state-owned mining company Kazatomprom being the world’s largest supplier. The company, which is listed on the London Stock Exchange, reassured investors that the protests did not lead to production outages and that work went smoothly. But anxiety pushed prices up by 8%.

Why?One analyst explained the situation as follows: Bloomberg like this:

Given Kazakhstan’s role as the world’s number one uranium supplier, “it’s as if Saudi Arabia has oil problems,” said Jonathan Hinze, president of UxC, a leading research and analysis company in the nuclear fuel market. “Even if there is no shortage now, the possibility that this will create a shortage is what people are currently trading.”

That’s actually worse, according to Amir Adnani, CEO of Uran Energy. Kazatomprom controls 40% of primary uranium production. This is more like OPEC in one country than Saudi Arabia.

Moreover, as more countries are adopting nuclear power, the closure of mines and the lack of new mines are hampering production. As a result, uranium supply is in short supply by about £ 50 million each year, and September prices are the highest in nine years. The gap is filled with rapidly depleting ground stock, the lowest level in 10 years. Adnani is:

The market was already in a structural deficit between supply and demand. And because the market was so concentrated in one country, it would have previously been exposed to geopolitical risks. [Kazakhstan’s protests]..

And now you have a situation [that] It shows how dangerous an industry is very concentrated. Especially when there are a lot of sudden concentration and geopolitical risks.

We relay all of this, not because it is a catastrophe in itself, but because it is a microcosm of the risks that can arise from a market that rarely gets the attention of investors. Domestic politics in distant countries is becoming more and more important. What if these protests arose in a future world that relied on nuclear power to solve the problem of renewable energy intermittentness?Or if a similar protest occurs in the Democratic Republic of the Congo, which accounts for 70% of the world. cobalt (Indispensable for electronic devices such as electric vehicles and telephones)?

Simon Quijano-Evans, Chief Economist at Gemcorp Capital Management, successfully emailed:

Whatever the reason for the turmoil, the current situation in Kazakhstan is a surprise to everyone, including political experts and neighbors.

But as democratic bastions have been occasionally threatened, as seen in both emerging and developed markets over the last two years, governments and voters everywhere need to remain aware of these risks. there is.

The world economy is sometimes claimed, Cancellation of globalization.. That may be true in margins, but don’t underestimate how integrated the world is already. The next big commodity shock can come from places that most investors hardly understand. ((((Ethan Wu).

One good reading

Elsewhere in FT, Alphaville’s Gemima Kelly Take Matt Damon to his crypto shilling job. As Kelly points out, it took actors only 10 years to move from anti-bank riot narration to cryptocurrency push.

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