'There is now ample evidence of a marked Chinese Credit slowdown. It may not be a “Lehman Moment,” but it’s definitely an “Evergrande Moment.” And it’s difficult to envisage sufficient Credit growth to sustain China’s historic Credit and apartment Bubbles.'Evergrande is the most indebted of a highly levered Chinese developer sector (top three in revenues). It “owns more than 1,300 projects in more than 280 cities.” Evergrande employs 200,000 – and “indirectly helps sustain more than 3.8 million jobs each year.” .. Beyond the stated $305 billion of balance sheet liabilities, there is likely a major issue with “off-balance-sheet shadow banking.”
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Evergrande issues go much beyond the bond market and financial engineering – to literally millions of individuals and businesses. Its employees, customers, and suppliers are heavily exposed.
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While not yet a “Lehman Moment,” a strong analytical case can be made that Evergrande presents a major catalyst for a deflating China Bubble. Bond investors will now approach housing finance with a much keener focus on risk. Apartment buyers will be less willing to provide developers big purchase deposits. Evergrande and others will unload apartments, with downside pressure on housing prices. Declining prices would likely see large quantities of unoccupied units (purchased for speculation) come to market, further depressing prices. Estimates have between 50 and 65 million empty Chinese apartments. Sinking prices would spur bankers to tighten lending conditions. Apartment bust.
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Back during the U.S. mortgage financial Bubble period, the CBB would highlight a metric “Calculated Transaction Value” (CTV) – multiplying home sales by average selling prices. This was reflective of mortgage Credit creation, finance fueling housing inflation, and new purchasing power propelling the Bubble Economy. And when a tightening of mortgage Credit led to slowing transaction volumes and falling prices, CTV indicated the degree of Credit slowdown weighing on the economic boom.
There is now ample evidence of a marked Chinese Credit slowdown. It may not be a “Lehman Moment,” but it’s definitely an “Evergrande Moment.” And it’s difficult to envisage sufficient Credit growth to sustain China’s historic Credit and apartment Bubbles.
“The U.S. will not allow Mexico to collapse” – 1994. “The West will never allow Russia to collapse” – 1998. “Washington would never tolerate a housing bust” – 2007. “Beijing has everything under control and will do whatever it takes to sustain China’s boom” – 2021.
Late Bubble cycle exultant confidence in policymakers is the kiss of death. After all, faith that crisis dynamics will be summarily quashed by omnipotent central bankers and government officials ensures aggressive risk-taking, speculation and leveraging. I’ve studied these dynamics for a while now, but I’ve never witnessed such faith in the competence and power of a government as is these days afforded to the great Beijing meritocracy – and that’s here in the U.S. as much as in China.
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Global markets showed signs of nascent speculator de-risking/deleveraging, with Chinese contagion stealthily gaining momentum. China, after all, evolved during this cycle into the marginal source of global Credit and, I believe, speculative leverage. The unfolding “Evergrande Moment” portends trouble ahead for myriad global asset and speculative Bubbles. However, complacency continues to reign throughout U.S. markets. Evergrande ramifications are dismissed, while attention remains fixated on a Fed seemingly determined to ride its reckless experiment in monetary inflation for as long as it can.
- Doug Noland,
Evergrande Moment, September 17, 2021
ContextProtests Spread As China's Real Estate Giant Evergrande Mired in Debt, September 13, 2021
China Evergrande is not 'too big to fail', says Global Times editor, September 17, 2021
China Evergrande's liquidity crisis deepens, report flags interest payment miss, September 15, 2021
'It’s terribly dangerous to assume that the prevailing extreme of speculative psychology is permanent...''Throwing Credit at such an acutely imbalanced economic structure at a cycle inflection point is fraught with risk.''..A bursting China Bubble .. a regime contemplating international conflict.'(August, 2021) - '..we’ve reached the most extreme valuations in the history of the U.S. financial markets..'(Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..'