3
$\begingroup$

News articles harbinger that defaults like evergrande's can collapse stock markets GLOBALLY — like the USA's — not just China's.

Could Evergrande cause a financial crisis?

Evergrande is an enormous company embedded across China’s financial system and economy, which relies heavily on property for growth and jobs. In theory, a collapse could chase investors away from other publicly traded developers, setting off a chain of defaults. Concerns are spreading through the bond market that the industry will suffer broadly, set off after Chinese luxury developer Fantasia Holdings Group Co. missed a $206 million U.S. dollar bond payment on Oct. 4. A collapse also could sour Chinese consumers on buying property at a time when sales are already slowing sharply, stranding investments and wiping out wealth. A collapse could also undermine the economic activity and jobs created by Evergrande and its downstream suppliers. Beijing has an extraordinary degree of control over banks and other key actors, so Wall Street analysts are generally betting the worst-case scenario of a Lehman Brothers-like crisis can be avoided.

But how? why? Here are two reasons I don't think such defaults can tumble Chinese, European, or North American stock markets.

  1. The CCP (Chinese Communist Party) is canny, crafty, foxy. It is blindingly obvious that CCP do NOT want — and will endeavor not to let — their own stock markets and economies crash. If Chinese stock markets crash, their citizens will fret and grouse. Citizens can even rise up and insurrect against CCP! Foreigners will not invest in China, withdraw, and halt their investments from China. Foreigners may criticize distrust China even more. Undoubtedly the CCP has nothing to gain.

  2. CCP is exceedingly affluent! CCP has MORE THAN enough money to pay for all these defaults! I'm quoting merely their gold and foreign exchange reserves. I have not even considered their other reserves!!!! Just edit my post to add their other moneys and reserves, if you know how much and what they are.

China Foreign Exchange Reserves | 2021 Data | 2022 Forecast | 1980-2020 Historical

Foreign exchange reserves in China inched up to USD 3.222 trillion in November of 2021 from USD 3.218 trillion in October, the second consecutive month of rising reserves and slightly higher than market forecasts of USD 3.212 trillion. Meanwhile, the value of gold reserves increased to USD 113.03 billion from USD 110.83 billion. source: People's Bank of China

$\endgroup$

1 Answer 1

0
$\begingroup$

What is happening in China is not a Lehman single moment crash that triggers counter-party contagion. The CCP effectively owns the printing press and all the counterparties. Rather, the result is a long-term but creeping grind that can cause contagion economically, and can definitely get worse, but will not be a single moment crash.

People focus too much on Evergrande, the biggest and most well-known developer — but it represents the froth of the Chinese Real Estate bubble. Evergrade is a problem in and of itself, but Evergrande is just the tip of the iceberg of a much larger problem. Focus on the general problem — the largest real estate bubble in history is starting to teeter. The real estate bubble is only one part of the Chinese debt problem. Chinese corporate debt is also enormous, and state owned enterprises are also notoriously over-indebted. Finally, the average Chinese consumer has grown more indebted than they once were — they used to be extremely debt-averse.

The 3.4 trillion USD RESERVES is not just free money that can be used to pay for stuff. As soon as China starts deploying their reserves for various purposes, they will simultaneously devalue their currency, which will be cataclysmal because currency devaluation will skyrocket the prices of what China is naturally short of — raw materials, energy, and food. Having 3.4 trillion in USD reserves DOESN'T make China bulletproof — China burned through 1/4 of their total USD reserves in 2015 alone, attempting to stabilize a market that was far less indebted and far less imbalanced.

China's economy drives demand worldwide, except the USA. 30% of all copper in the world is used just on the Chinese real estate sector alone. China is Germany's largest export market. China is one of the primary providers of liquidity to many poor emerging or frontier market nations. The old adage used to be "when the USA sneezes, the world catches a cold". But now, the global economy is driven by Chinese demand and liquidity, which depend on China's ever expanding debt bubble. If the Chinese economy collapses, China will halt loans to other emerging markets, This is like the USA halting their lending to Weimar Germany during the Great Depression, which led to the rise of the Nazi party.

If you think the US's "printing press" is bad, then you haven't looked at China's. Read the charts below. It's not just gov't printing press — it's the expansion of credit into a massive credit bubble, like Japan in the late 1980's. Private nonfinancial sector debt to GDP in China currently sits at 218% of GDP, which is high. The absolutely massive debt buildup in shadow credit of an additional 37 trillion in USD (253 trillion RMB) — estimated by the People's Bank of China itself as of 2017 — can be ruinous because it effectively doubles the debt-to-GDP, pushing China's private debt to GDP up over 500%.- Chinese Money Supply Growth (since 2000)- Chinese Private Credit Growth (since 2000)- Chinese Off Balance Sheet Liabilities (Shadow Credit Report from PBOC as of 2017)

The Chinese economy is independent from most Western financial institutions, at least based on what is reported. But the economic entanglement — based entirely on exponential growth in Chinese credit — affect economies globally. These worldwide economies also have banks and credit systems that depend on the economy continuing to grow and produce at stable levels — all held together by the fact that China has a closed capital account. Some Renmenbi (RMB) does leave China, but the CCP has increasingly cracked down on RMB outflows and capital flight. If the CCP allowed money in China to be FREELY allocated, it would leave the Chinese economy to more productive investments, and devalue the RMB. Then Chinese exports — if held at the same volume — would get even cheaper, which will deflate other economies and and inflate the Chinese domestic economy, which would put more pressure on the CCP.

Chinese local governments (already over-indebted) finance themselves through land sales to developers. In short, over-indebted governments (who employ large amounts of Chinese population) depend on over-indebted developers to buy land in order to finance themselves. Over-indebted developers depend on Chinese citizens continuing to purchase more and more apartments to keep the value rising, despite the fact that many of these apartments are unused, and for those who did not buy early, are already unaffordable for the average Chinese citizen. ​ Much more can theoretically snowball. The Chinese Real Estate is the most important asset class in the world due to the way it drives global demand. If Chinese Real Estate fails, then everything dependent on it collapses.

China has other related issues coming from China — including wealth imbalances, and an enormous demographic bust like Japan post 1989.

The entire system can keep perpetuating so long as credit can keep expanding. Unlike Western democracies, the CCP has control of every counterparty, and can intervene as they desire in any business or sector. The CCP can force big banks to lend to small banks, so that interbank lending does not freeze up as it did in the USA during the Global Financial Crisis in 2008. The constraint here comes down to access to foreign credit / investment / trade, inflation, and their exchange rate. Because the CCP has every incentive to not let things fail, they will be trying to deleverage to prevent things from getting beyond their control and collapsing. It's a fragile situation, but because of the control, China will not "crash" soon, and will try to keep a floor on any downward moves to promote social stability. But if you start seeing credit contagion in the financial sector from any of the big players, it could be a different story.

$\endgroup$
1
  • $\begingroup$ Your answer could be improved with additional supporting information. Please edit to add further details, such as citations or documentation, so that others can confirm that your answer is correct. You can find more information on how to write good answers in the help center. $\endgroup$
    – Community Bot
    Dec 19, 2021 at 7:11

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.