'It was a historic, reckless bubble, and, as we’re witnessing, the bursting will be no less spectacular .. the dam broke for Chinese bank CDS. China Construction Bank CDS jumped 17 Friday (25 on the week) to 123bps, surpassing the March 2020 pandemic crisis spike. With over $4 TN of assets, this is one of the largest banks in the world.''Recall the Treasury curve inverted back at the end of March for the first time since the brief inversion in 2019 (and before that 2007). Not coincidently, the Chinese developer bond market was badly dislocating in March, as Country Garden, China’s largest developer, saw its bond yields surpass 30% (traded below 10% in February). Those Crisis Dynamics were quelled by a lengthy list of Beijing stimulus measures.
Crisis Dynamics have, however, returned more powerful than ever, leaving Beijing officials in quite a predicament. The old, the tried and true, isn’t working.
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China’s households, developers, banks, regulators and Beijing officials are breaking ground on their introductory housing/mortgage finance bust. It’s worth noting that Consumer (mostly mortgage) borrowings almost doubled over the past five years (up 400% in 10yrs) to $10.85 TN. Chinese Bank Assets (up a record $1.945 TN during Q1!) surged 50% over the past five years (200% in 10 years) to an incredible $53.0 TN. Reports have mortgage Credit at $6.8 TN.
It was a historic, reckless bubble, and, as we’re witnessing, the bursting will be no less spectacular.
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Chinese aren’t necessarily known for their reverence for the sanctity of contracts. It’s started. Apartment buyers facing delays on their units refuse to honor their mortgages, and the word is spreading fast. And how might the typical owner respond when apartment values sink below the amount owed on their mortgage, especially for the estimated 60 to 100 million unoccupied units? For now, the mortgage boycott is a further major blow for a massive developer industry in collapse.
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Yet stocks are a sideshow. Country Garden bond (3 1/8% 2025) yields surged 11.5 percentage points (11,543bps) this week to a record 41.02%, with a two-week gain of over 14 percentage points (14,085bps). Longfor bond yields this week surged 13 percentage points to 116%. This is a top-five Chinese developer whose bond yields began the year around 7%. Sunac, another top developer, saw its bond yields jump 600 bps this week to 112% (began the year at 22%). And let’s not forget #3: Evergrande yields rose another 358 bps this week to 141%. Basically, the market is saying they’re all either bust or heading in that direction.
One can easily tally a Trillion dollars of liabilities from a handful of these gargantuan developers caught in a bond collapse vice. Ramifications are enormous – likely momentous. It was ominous to see Chinese developers and banks at the top of the Asia CDS leaderboard this week. Lonfor CDS surged 225 bps. Vanke, China’s fourth-largest developer, saw its CDS trade above 500 bps this week for the first time (ended week at 502 bps). Vanke CDS traded at 250 bps in mid-June and was below 100 bps back in September.
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China’s CSI 300 Bank Index sank 7.7% this week (largest weekly loss since 2018) to near March 2020 lows. And the dam broke for Chinese bank CDS. China Construction Bank CDS jumped 17 Friday (25 on the week) to 123bps, surpassing the March 2020 pandemic crisis spike. With over $4 TN of assets, this is one of the largest banks in the world.
Of the other “big four,” Bank of China CDS surged 20 Friday (19 on the week) to 117 bps, the high back to 2014. China Development Bank CDS rose 11 this week to 107 bps (high since 2017). Industrial and Commercial Bank CDS rose four to 104 bps (high in data back to 2017).
China sovereign CDS jumped nine this week to 90 bps, just below the March 2020 spike (91.5bps).
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Going “all out” with coerced lending at this stage of the cycle puts the entire banking system at only greater peril. Would Beijing continue to press the banks to lend aggressively if bank bonds were collapsing and depositors beginning to flee? This week’s CDS surge appeared to signal a new, more systemic Crisis Dynamics phase.
Contagion continues to gain momentum throughout the emerging markets. An EM CDS index traded up to 395 bps intraday Thursday (up 50bps w-t-d!), the high back to April 3, 2020 – before ending the week up 30 to 375 bps. For perspective, EM CDS hasn’t had a weekly 50 bps jump since September 2020.
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..Global Crisis Dynamics are systemic these days, as opposed to the regional blowups from the nineties. The scope of the bursting China Bubble is without precedent.
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July 11 – Wall Street Journal (Rebecca Feng): “International investors are rapidly unwinding what was once a popular trade in Chinese bonds. For years, foreigners loaded up on debt from Chinese state-owned lenders known as policy banks, which fund domestic and overseas projects like dams, roads and airports. The easy-to-trade yuan-denominated bonds were viewed as almost as safe as China’s sovereign debt, and paid higher interest rates. Russia’s invasion of Ukraine has prompted a rethink... Two of the three Chinese policy banks, China Development Bank and the Export-Import Bank of China, have lent billions of dollars to Russian borrowers that needed funding for uses including energy projects. They have been mostly silent about their exposures to Russia since the war broke out.”..
China has for years operated as banker to the EM “Periphery.” Now Beijing faces the predicament of throwing good “money” after bad or cutting bait and watching the dominoes begin to fall. And, by the way, how much of China’s $3.0 TN international reserve position is locked up in junk EM loans? We cannot today overstate the ramifications of Chinese financial instability.
July 13 – Wall Street Journal (Alexander Saeedy and Philip Wen): “As Sri Lanka’s foreign-exchange reserves began to dwindle under a mountain of debt early in the Covid-19 pandemic, some officials argued it was time to ask for a bailout from the International Monetary Fund, a politically fraught move that traditionally comes with painful austerity measures. But China, Sri Lanka’s largest single creditor, offered a tempting alternative: Skip the IMF’s bitter medicine for now and just keep adding on new debt to pay off the old, according to current and former Sri Lankan officials. Sri Lanka agreed, and soon $3 billion in new credits poured in from Chinese banks in 2020 and 2021. Now that plan has blown up, plunging Sri Lanka into chaos.”'
- Doug Noland,
Global Crisis Dynamics Update, July 15, 2022
Context (Global Stagflation) - '..price growth that is continuing to outstrip expectations..'(An economic Ponzi scheme) – Evergrande Moment – ‘China Evergrande is not ‘too big to fail’, says Global Times editor’(Global Stagflation) - 'This situation has essentially morphed into a cost-of-living crisis..' - Dr. Hunt(Disaster)(Fed, ECB way behind the curve) - 'US Inflation Quickens to 9.1% .. relentless price pressures..' - 'Inflation at current levels is a severe economic, social, and political problem..'(Global Stagflation) - 'Inflation hits record 8.6% for 19 countries using the euro [surging past the 8.1% recorded in May]'(Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..'