'An index of Chinese high-yield dollar bonds was pummeled, with yields surging 310 bps this week to 17.5%. This index yielded 8.20% at the end of May, and 12.0% to conclude August. For further perspective, this yield briefly spiked to 14.0% during the March 2020 pandemic crisis (back down to 8% by August).''It’s turning into a debacle. Evergrande bonds ended the week at 20 cents on the dollar, with yields surging to 72.5%. China’s real estate sector was hammered this week following the surprise default by mid-sized developer Fantasia Holdings.
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Many major developers have lost access to new finance, while real estate transactions throughout China have slowed dramatically. Mounting evidence suggests China’s historic apartment Bubble has been pierced. Now it’s a matter of how rapidly prices deflate. There appears no place to hide. Country Garden Holdings, China’s largest developer, saw yields (7.25%, 2026) surge 181 bps this week to 7.60%. Yields for this perceived pristine, investment-grade credit began September at 4.74%.
An index of Chinese high-yield dollar bonds was pummeled, with yields surging 310 bps this week to 17.5%. This index yielded 8.20% at the end of May, and 12.0% to conclude August. For further perspective, this yield briefly spiked to 14.0% during the March 2020 pandemic crisis (back down to 8% by August).
October 7 – Reuters (Marc Jones): “Investment bank JPMorgan has estimated that troubled Chinese property giant Evergrande and many of its major rivals have billions of dollars worth of off-balance sheet debt that, once added on, ramp up their leverage ratios. JPMorgan's China and Hong Kong property analysts said the tactic is likely to have been used to help firms look like they were conforming with new borrowing cap rules introduced last year, but Evergrande's case looks the most extreme. ‘Instead of true deleveraging, we think Evergrande has shifted some of the interest-bearing debt to off-balance sheet debt,’ JPMorgan's analysts said. ‘Commercial papers, wealth management products and perpetual capital securities, etc, which are not officially counted as debt.’ They estimated Evergrande's ‘net gearing,’ as debt as a ratio of a firm's equity is known, was at least 177% at the end of the first half of the year, instead of the 100% its accounts reported.”..
The week was notable for contagion spreading to Chinese bank credit default swap (CDS) prices. China Construction Bank CDS jumped six to 73, the high since June 2020, and up from 46 bps on September 17th. Industrial & Commercial Bank of China CDS gained five to 73 bps – the high since April 2020. China Development Bank CDS rose 5.5 to 66.5 bps – the high since April 2020, and up from 44 bps on September 16th. Bank of China CDS increased 3.5 to 70 bps – the high since May 2020, and up from 44 bps on September 17th.
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Beijing waited much too long to begin reining in its Bubble. Pandemic stimulus stoked already perilous excess. Now Chinese officials face a terrible predicament and onerous decisions. At this point, large liquidity injections could further stoke inflationary pressures, while risking a disorderly decline in the Renminbi.
The Fed waited much too long to begin reducing historic monetary stimulus..'
- Doug Noland,
Contagion, October 8, 2021
Context '..the current monetary system, based on credit expansion .. “manic-depressive” behavior..'(An economic Ponzi scheme) – Evergrande Moment – ‘China Evergrande is not ‘too big to fail’, says Global Times editor’'..manic excess has gone off the rails .. Injecting Trillions of new “money”..''Throwing Credit at such an acutely imbalanced economic structure at a cycle inflection point is fraught with risk.''..Things turn really crazy at the end of cycles. Monetary Disorder, Manias and Market Dysfunction..''..the disconnect between Wall Street and Main Street .. unsound money is incompatible with social and political stability.''The only cure for a Bubble is to not let it inflate.' - Dr. Kurt Richebacher((Hapto)praxeology) - '..Mises’s warning to the world .. not to suppress the market rate of interest in the name of creating prosperity.'.."financial slavery" that grips the world .. are of high human and personal cost..'(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..'