Evergrande Group, the world’s largest real estate empire is teetering.

[Alisoncc]

Evergrande Group, once the world’s largest real estate empire and now its most indebted company, is teetering. China’s authorities will be acutely aware that if it falls, it could bring down its increasingly vulnerable property market and ignite a financial crisis.

At the weekend, hundreds of investors - mainly its own employees - protested at Evergrande’s Shenzhen headquarters and other offices in China, demanding redemption of their investments in the company’s wealth management products after the group failed to make interest payments and meet withdrawals.

The fate of Evergrande has massive implications for China’s already shaky property market and the economy-at-large, with property sales accounting for close to 10 per cent of China’s GDP and property constituting the vast bulk of households’ wealth.

https://www.smh.com.au/business/banking ... l#comments

My understanding is that Chinese investors have been the major drivers of the global property market. Seems to be little written about the impact of a potential fire sale of real estate around the world as they seek to withdraw their funds. Thoughts please.

[OFSO]

Commented on in the Financial Times a couple of times. Usual business of using financial instruments and getting in over their heads. See Wirecard, Greensill, many others.

[Pontius Navigator]

relies on presales of its apartments for its cash flows.

Builders the World over. We tried to buy a new house. We naively thought we could go along, look at several houses, chose one and but it.

How many people with a home to sell have the odd £20,000 - £30,000 just sitting idle waiting for a builder to even release the plot?

I see they owe money to 150 banks. Bet HSBC is one.

Tiger economy? Bet the Tiger is biting its own tail.

[Undried Plum]

It's abundantly clear that a colossal financial crash is in the offing, sometime.

It's gonna be vastly worse than the last one because the measures taken to 'recover' from that one have been comprehensively exhausted. Those measure were very crude and blunt instruments: Near zero interest rates; vast levels of money 'printing'.

Interest rates are now below zero in some economies, such as in Europe. When savers realise that their money is devaluing at a rate of five or ten percent a year they rush to convert increasingly worthless fiat currency into goods and services. That's happening right now. That's why property prices have exploded. That's why there's a a massive shortage of building materials. That's why commodity prices have exploded. That's why stock market prices are through the roof, even for what are actually zombie companies.

The only 'solution' to the negative effects of excess moneyprinting is more and more moneyprinting. Eventually, something's gonna break and the collapse will be bewilderingly rapid once it starts.

By the very nature of a so-called 'black swan' event, it's practically impossible to predict the timing of the collapse or identify in advance the precise element in the global economy which will pull the trigger. My guess, for some years now, is that it will be a collapse in the Chinese property market(s). Not necessarily within China itself though. To a very large extent the London property bubble is propped up by Chinese money. As soon as Chinese investors start to have loans called in or are otherwise unable to service their debts they'll start to liquidate their assets. That will trigger a chain reaction, rather like a nuclear fission event.

In the particular case of Evergrande, I suspect that the Chinese government will try to deflate that particular souffle rather than burst it like the bubble that it is. Having saved one of those companies, rather the way that the Fed saved Bear Stearns, the next one will be the equivalent of Lehman Bros and the government will let it go to the wall.

The 'too big to fail' notion is a long-lived myth. It worked in the case of RBS, but there were political elements which forced Alistair Darling and Gordon Brown to bail out RBS and arrange a bailout for BoS and others such as the Dunfermline Building Society, but next time will be different.

Evergrande is currently the one to watch. It will set a wee bit of a precedent. Like so many apparently 'huge' firms, it is extremely heavily based on debt and once it is seen to be unable to service those debts it becomes practically impossible to raise further debt.

A pattern will become highly visible to the Mrs Wangs of China and the Mrs Watanabes of Japan, who are surprisingly well-informed and really quite shrewd. What they do about the situation is probably one of the most important features to watch too.

[llondel]

Of course, my self-interest and selflessness conflict mightily when it comes to property. I would like prices to remain high until I'm ready to cash in my investment in my house, which would help make retirement a lot easier when I move to a small place in a cheap area where I don't have to worry about a job, but I'm also aware that getting on the property ladder is hard for younger people. I had those concerns when I was that sort of age too, the chancellor announced he was going to abolish double tax relief on mortgages, so the property market exploded and way too many people bought overpriced property and subsequently ended up with negative equity. I just bought a new car, on the basis that if I was going to have to commute longer distance from where I was living, I might as well reduce the chance of breaking down, and eventually things cooled down and I was able to reach the bottom rung. Who knew then that I'd end up in a house in California - definitely not on my radar.

On the other hand, some of these property companies are a big cause of the rising cost of housing because they can afford to pay over the odds for the land and once they've got it, they have a stranglehold on the market because if they own all the usable land then they can set the price of houses/apartments based on demand.

[Undried Plum]

The Plunge Protection Team moved in at the start of the trading day in China this morning. They 'suspended' trading in Evergrande bonds for the rest of the day. In other words, the company not only cannot pay its interest payments, but it won't repay the capital either.

Next step will be to forcibly swap worthless bonds for worthless new equities. In order to deflate the souffle rather than burst the bubble, the debt for equity swap procedure will be stretched over years.

A dead duck with over $300Billion of debt. It's going to take some pretty clever market manipulation to fend off a contagious collapse in confidence in the market(s). The Chinese can do such a thing for one or two of these really huge cases, but not for many more than that. Then, what?

[Pinky the pilot]

Real Estate in South Australia has been grossly overpriced now for quite some time, and more than a few Financial commentators have stated that 'a correction' is on the cards sometime in the near future.

It's abundantly clear that a colossal financial crash is in the offing, sometime.

It's gonna be vastly worse than the last one because the measures taken to 'recover' from that one have been comprehensively exhausted. Those measure were very crude and blunt instruments: Near zero interest rates; vast levels of money 'printing'.

Yup. And it 'aint gonna be pretty, an' all!

[Pinky the pilot]

In the Weekend Australian Newspaper this last weekend, a front page article was headlined;

Hot market increases risk of crash

with a sub heading rein in property boom: IMF

''Runaway residential property prices could threaten the stability of Australia's financial system and need to be reined in, the International Monetary Fund says."

And in the South Australian Sunday Mail there was a report, headlined Hammer blow to buyers as market explodes of a 1960's built house in the eastern suburb of Burnside which at auction went for $505,000 above the reserve price.

The warning signs are appearing.

[Alisoncc]

Another huge Chinese developer requests government help as property crisis escalates

TAIPEI (Taiwan News) — One of China’s largest real estate developers, Sunac Group, has sent a letter to government regulators requesting “special policy support” and admitting its cash flow has hit major hurdles — a problem that sparked the Evergrande crisis.

The letter, sent to the city government of Shaoxing in Zhejiang Province on Friday (Sept. 24), said the company faces huge pressure, as housing market sentiments have “fallen to almost freezing point,” according to a Bloomberg report.

China Power Crunch Is Next Economic Shock After Evergrande

China quietly hits power supply shock as Evergrande crisis holds limelight

https://finance.yahoo.com/news/china-po ... 00280.html

(Bloomberg) -- China may be diving head first into a power supply shock that could hit Asia’s largest economy hard just as the Evergrande crisis sends shockwaves through its financial system.

The crackdown on power consumption is being driven by rising demand for electricity and surging coal and gas prices as well as strict targets from Beijing to cut emissions. It’s coming first to the country’s mammoth manufacturing industries: from aluminum smelters to textiles producers and soybean processing plants, factories are being ordered to curb activity or -- in some instances -- shut altogether.

Almost half of China’s regions missed energy consumption targets set by Beijing and are now under pressure to curb power use. Among the most affected are Jiangsu, Zhejiang and Guangdong -- a trio of industrial powerhouses that account for nearly a third of China’s economy.

“With market attention now laser-focused on Evergrande and Beijing’s unprecedented curbs on the property sector, another major supply-side shock may have been underestimated or even missed,” Nomura Holding Inc. analysts including Ting Lu warned in a note, predicting China’s economy will shrink this quarter.

The worsening power crunch in China -- perhaps overshadowed by the attention on whether Evergrande will default on its mammoth debts -- reflects extremely tight energy supply globally that’s already seen chaos engulf markets in Europe. The economic rebound from Covid lockdowns has boosted demand from households and businesses as lower investment by miners and drillers constrains production.

[Alisoncc]

Power cuts hit homes in north-east China

Residents in north-east China are experiencing unannounced power cuts, as an electricity shortage which initially hit factories spreads to homes.

People living in Liaoning, Jilin and Heilongjiang provinces have complained on social media about the lack of heating, and lifts and traffic lights not working.

Local media said the cause was a rise in coal prices leading to short supply.

The country is highly dependent on coal for power.

One power company said it expected the power cuts to last until spring next year, and that unexpected outages would become "the new normal". Its post, however, was later deleted.

https://www.bbc.com/news/world-asia-china-58704221

And heading into Winter, what do you do living in a high rise with no power? Can't exactly light a fire to get warm. Wouldn't want to be in Evergrande sales. You beaut apartments, air conditioning, dishwashers, high-speed lifts, etc, etc. unfortunately no electricity.

[Undried Plum]

Just because it's a one-Party state doesn't mean they don't have politics and it doesn't mean that they don't have politicians who fight eachother like ferrets in a sack.

It's a democracy. Politicians have to put themselves up for re-election. If they ****, they can be voted out. Those high-rise dwellers have a very powerful weapon to hold their own elected representatives to account.

One of the many first and most important duties of any government, made up of politicians, is to keep the lights on and to keep the home fires burning, either remotely through power stations and gas plants, or more literally by keeping the coal supply chain going.

The really big difference between their system and ours is that for us it's really easy to change Party, but really difficult to change the policies. In China, they can't change the Party, but they can change the policies.

That's why China has advanced so much in the last 30 years and why we have advanced so little.

[Pinky the pilot]

Thanks for your posts Alison. Most illuminating.

But it makes me wonder just why, other than the quotes you have posted and the IMF quote to which I referred, that there appears to be no great interest or concern from any of the Financial writers in any of the Aussie (or any other country for that matter) Media. At least not that I have been able to find.

Could I be somewhat cynical in saying that when (not if) the great 'correction' occurs that either all the pundits will say that it was 'all a great surprise/never saw it coming' etc etc or that' we all knew it was going to happen, just a case of when...'

In China, they can't change the Party, but they can change the policies.

Indeed they have. But it appears the change has been back to the Left.

[llondel]

In China, they can't change the Party, but they can change the policies.

Indeed they have. But it appears the change has been back to the Left.

Nice commie regime, starts to run out of money so lets the entrepreneurs have some fun to top everything up again, then once the coffers are refilled, clamp down on everything and back to previous business. It will be interesting to see what happens to all of those on top of their business empires over the next few years.

[Pinky the pilot]

It will be interesting to see what happens to all of those on top of their business empires over the next few years.

I suspect that arrest due suspicion of corruption/bribery of CP Officials, unspecified offences against the State, and subsequent jailing, or worse. After being found guilty in a closed court (show) trial, of course.

[Undried Plum]

Nice commie regime, starts to run out of money so lets the entrepreneurs have some fun to top everything up again, then once the coffers are refilled, clamp down on everything and back to previous business. It will be interesting to see what happens to all of those on top of their business empires over the next few years.

Sounds like Wall Street in 2008.

In UKUSA we have Socialism for the Rich and Capitalism for the Poor. The filthy rich banksters get bailed out while the poor get ****.

In China they've still got that bassackwards, but they're turning that around remarkably quickly.

[prospector]

"" Power cuts hit homes in north-east China "" A result of blocking Australian coal for the power stations perhaps? Might be a difficult task getting that supply up and running again.

[Alisoncc]

Thoughts on what one would do if resident in one of these penthouses with no electricity. Gets pretty chilly in NE China in Winter. Kero stoves for cooking. Light a fire on the balcony perhaps? Could be tricky if they used cheap Chinese cladding. Mind you they would all get warm together.

evergrandehigh.jpg (38.82 KiB) Viewed 1253 times

[Pinky the pilot]

Apologies for the late post, but the Weekend Australian Newspaper, in the Inquirer section page 15, has a large article headlined
The madness of home prices

with the subheading
The boom goes on, as regulators stand aside and politicians sit on their hands.

They cannot say that they have not been warned.

[Pinky the pilot]

And today it was announced by some Aussie Banks that anyone applying for a Housing loan had to demonstrate that they could make repayments if the Interest rate was (approximately) double that which it is at present.

Why do I have a vision of the Robot from the old 60's TV series 'Lost in Space' waving its robotic arms madly about and yelling "Warning, Warning, Warning...."

[Undried Plum]

A not very near neighbour, who is regarded as a bit of an arsehole in the farming community, has had his mortgage pulled by Brand X who are themselves in a spot of bovver as a result of some unwise and greedy counterparty risk. They're selling his substantial house and its abundant acreage for whatever they can get so long as it's more than the amount he owes. A chum of mine put in a derisory offer, just a wee bit over the amount that is listed in the Land Registry as having been mortgaged 16 years ago, and it's now closing at noon on Friday.

The arsehole bears an uncanny resemblance to Ernst Rohm. Isn't schadenfreude a German word?