Evergrande Crisis: China's Late Stage Capitalism

[Rasulis]

Did a quick napkin math.

68B to banks + 300B to subs and suppliers + 1.4 million buyers times 200k down payment = 68B + 300B + 280B = a lot of money.

Evergrande current market cap is 35.38B. They lose 90% of their stock value. So in total, Evergrande investors lost almost 320B.

All said and done, we are looking at around a trillion dollar.

[Cosmic Janitor]

Did a quick napkin math.

68B to banks + 300B to subs and suppliers + 1.4 million buyers times 200k down payment = 68B + 300B + 280B = a lot of money.

Well that would be about half of China's national yearly budget.
Not pretty but also not insurmountable.

[Omega10]

if a business is run poorly, it shall go bankrupt, because if it failed it can fail again and has little reasons to exist. this is why saving is so important for employees, and why inflation is bad. at last resort, the state shall help people if they have problems to eat or have a decent home.

At the end of the Bush administration, the US dealt with a similar situation. We ended up bailing out the banks.

On the other hand, the middle class in the US has been slowly sinking ever since. And the US financial system is about as stable as the Chinese financial system with the difference being that we have a strong media to run interference for our banking interests.

The fate of the US and the fate of China are not independent events. If one fails, the other has a good chance of failing soon after. We need their goods (EVERYTHING we make relies on Chinese manufacturing), and they need our markets. The feeble attempts that have been made to decouple our economies have mostly failed - with a huge amount of press playing up the few exceptions.

[Rasulis]

Ut oh!

China Oceanwide Tries to Save U.S. Deals as Evergrande Sways

As the financial world warily watches the fate of cash-strapped China Evergrande Group, another big Chinese property developer is facing a ticking clock too, tied to projects in Manhattan, Los Angeles and Hawaii.

[Muzjhath]

But major US and EU investment funds have been buying Evergrande stocks, in a likely anticipation of the inevitable government bail out/nationalization.

Considering how China and Chinese often seen contracts. That sounds like a dumb bloody investment to me.
If shit goes 100% up shitcreek, China as a whole will say "Nothing is wrong". Some before this rich and upstanding party members will go away. And all Chinese assets owned by foreign nationals will be nationalised by fiat.

Or rather. If the company dies China won't pay out debt it doesn't see itself having too. While it very well might make sure to save enough people that might get crushed to not make them raise to much of a stink outside of the cities.

[Cæli]

At the end of the Bush administration, the US dealt with a similar situation. We ended up bailing out the banks.

On the other hand, the middle class in the US has been slowly sinking ever since. And the US financial system is about as stable as the Chinese financial system with the difference being that we have a strong media to run interference for our banking interests.

The fate of the US and the fate of China are not independent events. If one fails, the other has a good chance of failing soon after. We need their goods (EVERYTHING we make relies on Chinese manufacturing), and they need our markets. The feeble attempts that have been made to decouple our economies have mostly failed - with a huge amount of press playing up the few exceptions.

bad decisions. the middle class is sinking because the money used for saving has been losing a lot of value due to inflation over the years. that and probably bad politics from the country on top, such as massive debts
I heard many americans are living paycheck to paycheck and debt is often favored; this is about as bad as it could get for future stability, and this has to have with either culture, education or politics. this doesn't do the average citizen any good, and doesn't do future generations any good either

relying on a foreign country is also a political choice. this can be good or bad depending on the type of goods. too complex to detail but too many bad decisions will end up leading to disasters. I'm not too pessimistic though, because our level of technology is quite high regardless relative to our basic needs

[Zan15]

Well that would be about half of China's national yearly budget.
Not pretty but also not insurmountable.

well that is comparing a yearly budget to debt that is due over 1-3-5-10-30 years. Not really a fair comparison.

[Jastall]

It is a shitshow, shows why "too big to fail" companies should not be allowed to exist. They can bring down entire economies. Just like 2008 crash, this one might cost millions of people their savings, jobs and have devastating effect on other industries.

If you want to see unbiased non-politicised non-clickbait-y explanation of what's going on, this is an excellent video:

Great video, and shows how fucked the economy is from the average Chinese's point of view, who has to pool savings across an entire family and still be face with unreasonable debts just to buy spectacularly overpriced housing due to poor decision making by both company leads and politicians, lack of regulations until recently and (most likely) corruption on a very large scale. This is one of the costs of trying to save face and flaunt how rapidly your economy grows when your citizen's capacity to actually buy shit doesn't follow suit.

[Nurasu]

Economic instability like this is a downside of a socialist economy, since there isn't really a true free market system to govern it more organically.

I love how this is an entirely capitalistic failure, but socialism still gets blamed.

[Rasulis]

well that is comparing a yearly budget to debt that is due over 1-3-5-10-30 years. Not really a fair comparison.

The bank loans are fine. Banks can always write the debt off.

The 300B owed to subs and suppliers is a different story. Those companies will go bankrupt without the payment. Likely creating a cascading chain of bankruptcies.

Then we have the 1.4M prospective home buyers which are currently trying to claw their upfront money back from Evergrande. Personally, I think they are screwed.

- - - Updated - - -

Great video, and shows how fucked the economy is from the average Chinese's point of view, who has to pool savings across an entire family and still be face with unreasonable debts just to buy spectacularly overpriced housing due to poor decision making by both company leads and politicians, lack of regulations until recently and (most likely) corruption on a very large scale. This is one of the costs of trying to save face and flaunt how rapidly your economy grows when your citizen's capacity to actually buy shit doesn't follow suit.

The problem is that for the Chinese middle class there are two vehicles for investment. China's stock market which is ridiculously volatile. As in a crash every other year. The other is in real estate. Which has not seen a price correction in almost 15 years and kept going up due to monetary infusion by the government. So they all went into real estate. Watch what happened when a couple of million Chinese try to get off the ride at the same time.

[Corvus]

Evergrande has missed the deadline to pay the 83 million payment due today and next week they have another 42 million owing. They still have 30 days grace before it becomes a default stock prices fell sharply again as a result.

[Jastall]

The problem is that for the Chinese middle class there are two vehicles for investment. China's stock market which is ridiculously volatile. As in a crash every other year. The other is in real estate. Which has not seen a price correction in almost 15 years and kept going up due to monetary infusion by the government. So they all went into real estate. Watch what happened when a couple of million Chinese try to get off the ride at the same time.

Oh, I'm definitely not blaming the average Chinese for investing in real estate, when it's basically their only sensible choice and there was a general understanding that the government had the back of their investment in those companies. But I definitely am blaming the government for using that artificial growth to reach their politically-mandated targets designed to save face, and the companies for allowing this situation to fester while the higher ups profit hugely from it. I'd wager a lot of people in power in China saw this scenario coming and this nothing, out of self-interest, fear of reprisal from crossing the Party, or likely both. It's clearly a systemic, if not almost systematic, failure.

[Corvus]

I expect the CCP is working hard to arrange a soft landing, but if they can't it could be very very bad.

There are at least 10 other large firms in trouble, just not at Evergrande level. If Evergrande goes under it could cause a ripple effect due to falling property prices and banks not being able to loan. Those 10 firms have 2.7 times the assets of Evergrande.

Then there is the aforementioned middle class who poured their money into investing in properties that are going to loose value or may not even exist yet.

And on top of that, local governments were getting up to one third of their budgets from land sales, but those sales have now fallen off a cliff, up to 90% in some cases, which is going to leave a major hole in their budgets.

The CCP may be looking at well north of a trillion dollars to fix this mess.

[Corvus]

All share trading in Evergrande has been suspended pending an announcement of a 'major transaction'. Rumour has it another real estate company is taking a major stake in one of Evergrande's business.

[Rasulis]

All share trading in Evergrande has been suspended pending an announcement of a 'major transaction'. Rumour has it another real estate company is taking a major stake in one of Evergrande's business.

I could never figure out China's real estate market. Lets take a look at property price in Shanghai.

An apartment near the town center is around $1,600 per square foot. So a 900 sq. feet apartment is $1,440,000. The average salary after tax in Shanghai is less than $20k per year. Who the hell are buying those apartments? You don't even own the land. You are leasing it from the government for 75 years. As for the quality, look up tofu-dreg projects. Yeah. That perfectly describe every single recent China's construction projects.

[Endus]

I could never figure out China's real estate market. Lets take a look at property price in Shanghai.

An apartment near the town center is around $1,600 per square foot. So a 900 sq. feet apartment is $1,440,000. The average salary after tax in Shanghai is less than $20k per year. Who the hell are buying those apartments? You don't even own the land. You are leasing it from the government for 75 years. As for the quality, look up tofu-dreg projects. Yeah.

The problem is China has been developing at a ridiculous pace.

Remember a few years ago when everyone was laughing at China for building entire empty cities? Those cities got filled; they were correctly predicting a massive rural-to-urban shift and pre-built to accommodate that shift. https://www.bloomberg.com/news/featu...tricts-fill-up

Pudong was the first "ghost city", and it's pretty successful at the moment.

Also, there is a truly ridiculous amount of money being made in China. There's more rich people in China than in America, right now; https://www.theguardian.com/business...richest-people
That's obviously a little out of scale, as we're not factoring in China's overall larger population and talking in per-capita terms, but there's a lot of wealth being made there, millions of people who can afford the prices you're listing. You're also talking Shanghai near the town center; if you look at Manhattan prices, they'll be sky-high too.

The Evergrande thing is a consequence of this rapid development and enrichment; things are changing so rapidly that there's very little margin to be had around the edges; developers are overextending to keep pace with demographic shifts, and that involves a lot of relatively short-term (next ~5 years or so) planning and major shifts in that progression can cause huge problems.

[Rasulis]

The problem is China has been developing at a ridiculous pace.

Remember a few years ago when everyone was laughing at China for building entire empty cities? Those cities got filled; they were correctly predicting a massive rural-to-urban shift and pre-built to accommodate that shift. https://www.bloomberg.com/news/featu...tricts-fill-up

Pudong was the first "ghost city", and it's pretty successful at the moment.

Also, there is a truly ridiculous amount of money being made in China. There's more rich people in China than in America, right now; https://www.theguardian.com/business...richest-people
That's obviously a little out of scale, as we're not factoring in China's overall larger population and talking in per-capita terms, but there's a lot of wealth being made there, millions of people who can afford the prices you're listing. You're also talking Shanghai near the town center; if you look at Manhattan prices, they'll be sky-high too.

The Evergrande thing is a consequence of this rapid development and enrichment; things are changing so rapidly that there's very little margin to be had around the edges; developers are overextending to keep pace with demographic shifts, and that involves a lot of relatively short-term (next ~5 years or so) planning and major shifts in that progression can cause huge problems.

Beijing, Shanghai, Guangzhou, Shenzhen are first tier Chinese cities so I might have picked a bad example. Lets take a look at Weifang which is a fourth tier Chinese city. Price of apartment near city center is $1,152.87. That is higher than the average per square foot price of a home in San Francisco which is currently the 1st or 2nd most expensive real estate market in the US right now. BTW, the average rental price of a one-bedroom apartment near city center in Weifang is $210.

[Endus]

Beijing, Shanghai, Guangzhou, Shenzhen are first tier Chinese cities so I might have picked a bad example. Lets take a look at Weifang which is a fourth tier Chinese city. Price of apartment near city center is $1,152.87. That is higher than per square foot price of a home in San Francisco which is currently the 1st or 2nd most expensive real estate market in the US right now. BTW, the average rental price of a one-bedroom apartment near city center in Weifang is $210.

I still think you're significantly underselling the amount of people with serious money present in China.

[Rasulis]

I still think you're significantly underselling the amount of people with serious money present in China.

You could be right. Still, for comparison.

A $735K one bedroom/one bath apartment in SF.

A $785k apartment in Zaozhuang, China. Zaozhuang is one of the smallest prefecture city of Shandong.

[Corvus]

The problem is China has been developing at a ridiculous pace.

Remember a few years ago when everyone was laughing at China for building entire empty cities? Those cities got filled; they were correctly predicting a massive rural-to-urban shift and pre-built to accommodate that shift.

Ghost cities are still a thing. There is currently housing for 90 MILLION people sitting empty in China and they are still building more. Evergrande alone has presold another 1.3 million units that they are yet to build.

And with China's population now aging and shrinking that much housing isn't needed.