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Generational Dynamics Web Log for 25-Sep-2021
25-Sep-21 World View -- China Evergrande construction firm heads to default

Web Log - September, 2021

25-Sep-21 World View -- China Evergrande construction firm heads to default

Crypto-currency crackdown

by John J. Xenakis

This morning's key headlines from GenerationalDynamics.com

China Evergrande construction firm heads to default
Scrambling to avoid a 'systemic' financial crisis and social unrest
The 'moral hazard' problem
Crypto-currency crackdown

China Evergrande construction firm heads to default

An unfinished Evergrande construction project in Taicang, China (Quartz)

An unfinished Evergrande construction project in Taicang, China (Quartz)

Last week, it was clear that China Evergrande Group real estate construction and retail investment firm was a gargantuan Ponzi scheme that was headed for default soon, unless the Chinese Communist government executed an extremely risky bailout. (See "16-Sep-21 World View -- China's Evergrande financial crisis threatens China's financial stability")

By Friday, 24-Sept, Evergrande was scheduled to pay $83.5 million in interest payments on dollar-denominated bonds held by overseas investors (i.e., non-Chinese). Evergrande missed those payments, but Evergrade will not be in technical default until a 30-day grace period has passed.

Evergrande owes another $47.5 million to offshore investors next week, and $669 million by the end of the year. By the end of next year, Evergrande has to pay back $7.4 billion, as a number of bonds mature. All in all, Evergrande has $305 billion in liabilities.

Scrambling to avoid a 'systemic' financial crisis and social unrest

Evergrande interest payments due, 2021-2024 (Bloomberg)

Evergrande interest payments due, 2021-2024 (Bloomberg)

Beijing cannot save Evergrande, but the Chinese Communist regulators have announced that they will henceforth be closely supervising decisions by Evergrande. They will override international financial norms and agreements to achieve the political ends of preventing a "systemic" financial crisis or social unrest.

Under direction from regulators, Evergrande has reportedly made arrangements with local (Chinese) bondholders to delay interest payments.

Offshore (non-Chinese) bond holders will not be made whole. Current estimates are that if you hold an Evergrande bond, then you'll receive only 25% of its value, though that number could fall as time goes on. However, most offshore bond holders are actually large international banks, like the Swiss bank UBS, which holds $275.7 million in Evergrande's bonds.

There is little appetite in Beijing to pay back Western bondholders, but this is offset by worries that Chinese companies will not have access to dollar funding in the future. So some accomodation will be made for Western bondholders.

As for local (Chinese) banks, Beijing has injected billions of additional yuan into the banking system to prevent "contagion" -- bank failure resulting from Evergrande failure, in the cases where bank loans won't be repaid.

Beijing is telling Evergrande to pay off Chinese retail investors first. The objective is to avoid social unrest.

Beijing is also telling Evergrande to finish up its unfinished homes under construction, for the same reason. Evergrande is estimated to have a staggering 1.5 million unfinished properties, for which down payments have been collected, but many of which have stopped construction, for lack of funding. Private property developers are being told to prepare to take over projects left unfinished by Evergrande.

Evergrande's Ponzi scheme involved using the down payments for new homes to pay off old debts. Many of these down payments were also used for risky ventures in electric vehicle manufacturing, bottled water, football clubs, and amusement parks. So now, many of these homes are incomplete in ghost cities.

Evergrande is offering a fire sale of unfinished or unoccupied properties, in order to generate cash. Estimates are that you can get something for 40% of its market value. However, China's real estate is in a bubble, and there is a fear that this action will cause property values generally to fall sharply, causing bankruptcies in other areas of the economy.

Chinese banks, including Bank of China and China CITIC Bank Corp, are now closely monitoring their own clients and scrutinizing all loans, to make sure that no other construction firm is about to fail because of its own Ponzi scheme. Credit is being eliminated or tightened for fourth-tier and third-tier cities across China. Smaller Chinese banks are themselves being scrutinized for viability.

The 'moral hazard' problem

Whenever any investors or debtors are bailed out for any reason in any country, there is always a "moral hazard" problem. This is the problem that risky or reckless behavior should not be rewarded with a bailout, since that will encourage others to pursue to risky and reckless behavior.

According to reports, Chinese regulators do not want to get involved in any sort of bailout of Evergrande or any of its subsidiaries until the very last moment, and then only if absolutely necessary.

Most analysts seem to believe that the Chinese Communists will be able to contain the damage from an Evergrande default, with no systemic damage to China's economy and no sustained social unrest or rebellions, although investors outside of China may lose all or almost all of these investments.

Crypto-currency crackdown

Last week's article described a related matter -- a crackdown on China's Macau, the gambling capital of Asia. I'm told that the purpose of the crackdown was end Macau's use of money laundering, particularly the practice by wealth mainlanders of using sending money abroad through Macau.

This week on Friday, the Chinese Communists announced a crackdown on crypto-currencies like Bitcoin. Not only will use of cryto-currencies be made illegal, but any transactions involving the cryto-currencies will be illegal.

Once again, this is apparently a way to prevent money laundering, particularly when used to send money abroad.

Sources:

Related Article:

China's Evergrande financial crisis threatens China's financial stability (16-Sep-2021)

(Comments: For reader comments, questions and discussion, see the Generational Dynamics World View News thread of the Generational Dynamics forum. Comments may be posted anonymously.) (25-Sep-2021) Permanent Link
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