Actually this may just be a nothingburger. What likely happens is a restructure and foreigners have to write off some debt. But it is printed money anyway, as in leveraged. What the foreign lenders received back in interest so far and will get back in interest after the restructuring, is still more than their write-off so they ended up making money.
It is the same game, as why banks keep lending money to corrupt Latin American and African regimes after they went under. It is also why a company called GM still exists and can take out loans. We will keep lending these developers money as long as we expect to get more back than we give.
The far more interesting game is what to do with the domestic borrowers and the actual unfinished buildings. That is potentially far more damaging for China, than some reputational damage. They cannot just pull the rug under all those middle-class people who have unfinished and unlivable apartments in ghost towns, and who's pension depends on these being valued at high paper values. But at the same time, there seems to be no plan for finishing many of them. Time (as in inflation) can solve many debt issues, but at some point in time they got to deal with the physical reality as in physical buildings too.
Evergrande's offshore bonds have been trading at 20 cents on the dollar, and its looking like that was still an egregious overpricing. If Country Garden also spirals into liquidation the holders of that $11 Billion are going to be lucky to get back $1 Billion on their notes.
Here's where it gets thorny for China: investors are already turning away from China, as Beijing tries to limit access to economic and financial market data.
Country Garden's default is not going to make Chinese capital markets any more attractive.
As for what happens with the unfinished homes--excellent questions all. The inability of developers to finish housing projects is already crippling home sales, with severe knock-on effects for the developers.
China's real estate development model relies on prepayment for the home before it is built trusting the developer to finish. That trust has been well and truly broken.
The reputational damage becomes significant because of that ruptured trust. For China to resurrect its real estate sector there has to be a means to rebuild trust both in the markets and in the government. The CCP possessing significant credibility overseas would be the platform upon which to rebuild that trust (so long as the CCP is credible overseas it has a basis on which to spin necessary property market reforms).
As it stands, China is losing credibility in the overseas markets, and that is going to impact its ability to execute reforms of its property markets to rebuild trust--and without that trust, it cannot resurrect its property markets in anything resembling their current form. The Chinese people just aren't going to be buying homes at the pace they have been, and that means the ones that have been purchased are going to steadily lose value. Wealth destruction is already occurring in China as a consequence.
Keep in mind they've already had one episode of mortgage boycotts and related social unrest.
Country Garden's default could spark a renewed interest in such boycotts, and that quickly becomes an existential political crisis for the CCP.
I doubt this is going to be a nothingburger. There are just too many pieces of dry tinder in China's real estate markets for there not to be a firestorm of some kind.
Agreed, again, Peter, and this gives me a bad feeling in my gut, as if it will cause the Chinese leaders to save face by trying to cover it up with a Taiwan invasion, right when we're enmeshed with the Middle East conundrum, because Israel was demonstrating against their leader about the bad vax impacts, so who knows if this quickly rolls downhill into World War 3, while I watch helplessly...so upsetting!
It's a cold comfort, but WW3 is far more likely to be triggered by Iran than China.
One strategic reality Xi Jinping cannot ignore: 75% of China's oil comes through the Malacca Strait. China does not have any blue water naval capacity to defend the Strait, which means any war between China and the US or India causes China to deindustrialize in 9-12 months and very likely suffers a crippling famine at about 18 months. Two years after China invades Taiwan the CCP ceases to exist.
Actually this may just be a nothingburger. What likely happens is a restructure and foreigners have to write off some debt. But it is printed money anyway, as in leveraged. What the foreign lenders received back in interest so far and will get back in interest after the restructuring, is still more than their write-off so they ended up making money.
It is the same game, as why banks keep lending money to corrupt Latin American and African regimes after they went under. It is also why a company called GM still exists and can take out loans. We will keep lending these developers money as long as we expect to get more back than we give.
The far more interesting game is what to do with the domestic borrowers and the actual unfinished buildings. That is potentially far more damaging for China, than some reputational damage. They cannot just pull the rug under all those middle-class people who have unfinished and unlivable apartments in ghost towns, and who's pension depends on these being valued at high paper values. But at the same time, there seems to be no plan for finishing many of them. Time (as in inflation) can solve many debt issues, but at some point in time they got to deal with the physical reality as in physical buildings too.
Evergrande's offshore bonds have been trading at 20 cents on the dollar, and its looking like that was still an egregious overpricing. If Country Garden also spirals into liquidation the holders of that $11 Billion are going to be lucky to get back $1 Billion on their notes.
Here's where it gets thorny for China: investors are already turning away from China, as Beijing tries to limit access to economic and financial market data.
https://substack.com/@allfactsmatter/note/c-42053362
As it is, foreign direct investment in China has collapsed from $400 Billion in 2020 to $20 Billion in 2023.
https://www.fxstreet.com/news/foreign-corporate-investment-collapsing-in-china-nataxis-202310101738
Country Garden's default is not going to make Chinese capital markets any more attractive.
As for what happens with the unfinished homes--excellent questions all. The inability of developers to finish housing projects is already crippling home sales, with severe knock-on effects for the developers.
https://newsletter.allfactsmatter.us/p/is-chinas-real-estate-bubble-reaching
China's real estate development model relies on prepayment for the home before it is built trusting the developer to finish. That trust has been well and truly broken.
The reputational damage becomes significant because of that ruptured trust. For China to resurrect its real estate sector there has to be a means to rebuild trust both in the markets and in the government. The CCP possessing significant credibility overseas would be the platform upon which to rebuild that trust (so long as the CCP is credible overseas it has a basis on which to spin necessary property market reforms).
As it stands, China is losing credibility in the overseas markets, and that is going to impact its ability to execute reforms of its property markets to rebuild trust--and without that trust, it cannot resurrect its property markets in anything resembling their current form. The Chinese people just aren't going to be buying homes at the pace they have been, and that means the ones that have been purchased are going to steadily lose value. Wealth destruction is already occurring in China as a consequence.
Keep in mind they've already had one episode of mortgage boycotts and related social unrest.
https://newsletter.allfactsmatter.us/p/real-estate-crisis-banking-crisispolitical
Country Garden's default could spark a renewed interest in such boycotts, and that quickly becomes an existential political crisis for the CCP.
I doubt this is going to be a nothingburger. There are just too many pieces of dry tinder in China's real estate markets for there not to be a firestorm of some kind.
Got gold?
Agreed, again, Peter, and this gives me a bad feeling in my gut, as if it will cause the Chinese leaders to save face by trying to cover it up with a Taiwan invasion, right when we're enmeshed with the Middle East conundrum, because Israel was demonstrating against their leader about the bad vax impacts, so who knows if this quickly rolls downhill into World War 3, while I watch helplessly...so upsetting!
It's a cold comfort, but WW3 is far more likely to be triggered by Iran than China.
One strategic reality Xi Jinping cannot ignore: 75% of China's oil comes through the Malacca Strait. China does not have any blue water naval capacity to defend the Strait, which means any war between China and the US or India causes China to deindustrialize in 9-12 months and very likely suffers a crippling famine at about 18 months. Two years after China invades Taiwan the CCP ceases to exist.