Evergrande and Second Financial Crisis

Hi fellow armchair economist, Sinophiles and fortune tellers of OzBargain.

What do you all think of the growing crisis with Evergrande? Lehman Brother redux? With 75% of all household wealth stored under the bed of the housing market in China and with almost 90% Chinese are "home owners" with massive mortgages, are we going to see the housing market bubble burst if Evergrande and other developers go under? Which might reduced consumer spending, see a retraction of the Chinese economy, triggering another global financial crisis? Or will Uncle Xi save the day?

Poll Options

  • 31
    Move along, nothing to see here, all is well
  • 19
    Evergrande is too big to fail, CCP will bail them out
  • 10
    First domino about to fall, get ready to watch China economy collapse but somehow we're safe here
  • 58
    Global financial crisis 2.0 Beta: to be released on Thursday

Comments

  • +6

    Copying from reddit -

    Apparently global financial organisations don’t have a lot of any exposure to Evergrande unlike Lehman Brother which caused a domino effort.

    Anyone trying to convince you that the bankruptcy of evergrande alone is what is causing fears has a very low understanding of the situation imo. The broader problem is the horrendously over-leveraged property bubble in China and the bankrupcty problems of Evergrande are a tip of iceberg situation.

    Fallout not so much direct liabilities… 300 billion losses on a single company are literally a drop in the world bucket… but a monumental bubble burst in the second largest economy in the world would see major global recession (again).

    • +3

      Ahh yes, all the expert are on Reddit these days (and every Redditor is an expert). I thought I try and see what OzBargainers thinks about the issue for a change.

      • +1

        When you consider a lot of news.com.au articles are sourced directly from Reddit and the influences on the forums on this site, I think we can agree that Reddit is a social media news source unlike any other.

        • +5

          news.com.au articles are sourced directly from Reddit

          Both complete trash, so it makes sense.

    • -1

      And we thought we had it bad here with 30 year mortgages.
      Over in China they have multi-generational mortgages - Aussie house prices on a sweatshop salary.

      *also Sinic, another of China's huge developers which has a $340 million AUD bond due in October looks like it won't make it.

  • Buy the dip.

    • When the dip?

      • +15

        French Onion?

    • +1

      Yes please let me know when it hits the bottom :)

      • Most (expert) commentators agree a 5 to 20% pull back is overdue. Fire and Ice scenario, with the latter being the ugliest (margin calls, all stocks, gold tanking, etc.).

  • +1

    Probably the very fundamental question for us ozbargainers is:
    can we buy things cheaper [because of/ after the event]?

    • will RMB be cheaper [AUD be more expensive - things on AliExpress be cheaper?]
    • will the event worsen the Australian economy [affecting our buying power to buy all sorts of gadgets?]
    • +1

      We bargainer mostly buy envelops, power banks and charging cable….so shouldn't be worrying much….

      • +4

        We bargainer mostly buy envelops

        We are buying envelops now?

        • Envelops to store the eneloops

    • +4

      No and Yes, Australia's top export country is China. China falls, Australia will follow due to decades of not diversifying the economy and putting all our eggs as ore and some farm goods in one basket.

      • +1

        I wonder though whether the frosty relationship with china, especially over the last year or two, where China has already but restrictions on certain industries will mean that the affected industries in Australia are already well on their way to diversifying away from China.
        So yes, we will get less demand, but maybe we have already started to adjust?

        • Sadly no. Oddly to punish Australia, they buy a lot from the US which is not complaining.
          Other large markets like the often touted India is short of US or RMB currency funds.

    • +2

      Hello Sir, have you thought about buying into the Chinese property market? I can introduce you to some excellent deals

  • +5

    Now the time for China to open up to foreign property investors. That’ll show em who’s boss!

  • +2

    It’s not just evergrande too, a lot of the others are going down too

  • +1

    But won’t anyone think of Hong Kong cinema..

    • Jackie Chan, no. 1!

  • +1

    The thing about this is that it's happening in an authoritarian country. Who knows what rabbit/demon they might pull out of the hat?

    • +6

      Same thing in libertarian countries. Printer goes brrrr

  • +4

    Any ETFs or pension funds that have these in their bags will get rekt. It's better to sell now than after the market is finished gutting the bag.

    https://files.ozbargain.com.au/upload/393946/91325/screensho...

    Get some popcorn and enjoy the show.

    • awesome, thanks for that. Should we be checking that our superfunds are not part of the fun?

      • It's not my work. I found it on YT.

    • Anyone know how to read this properly? Is the 28.375 at the top the value of one share, and then the top holder being BlackRock holding 43,776 shares? That only multiples out to $1.2m, which is tiny and doesnt make sense.
      What's the "out %" column? Outflow? over what period?

      And the File Dt column suggests this is when this was filed with some market overseeing org, so is this just recent purchases rather than total holdings?

  • +2

    Poll option missing; what's Evergrande?
    .

  • +1

    The Australian property market to a limited extent will be affected. Many projects here are financed by Chinese developers and so they will liquidate assets to concentrate funds somewhere else. Will take some further catalysts for the rest of the market to topple but it's not impossible.

  • +1

    Not a 'big deal' will see the markets drop until the un-certainty disappears but the impacts will be short lived.

    The people most affect will be those (million or so individuals) who have purchased a property that will be half built

    • +3

      I agree this will be the first order impact.
      I read the stat today too, about 90% of Chinese being householders, but my limited understanding of Chinese real estate is that is meaningless.
      I think the vast bulk of Chinese people were deeded their residence as part of Deng Xiapeng land reforms, so it was probably close to 100% home owners in the 1990s, with zero mortgages.

      Since then, there has been turnover - farmers selling out single family plots for corporate farms and people being bought out from their old laneway townhouses in exchange for suburban apartments. And a bunch of property speculation.

      But I would be gobsmacked if there were more mortgages there than here (about 1/3rd of homes here are mortgaged, 1/3rd owned outright and 1/3rd rented - though that could have an investor mortgage).

      The second order impacts could be unpleasant if it turns out a bunch of European banks have loaned Evergrande money - most Euro banks outside Germany are pretty thinly capitalised, so their counter parties will be suspicious. Just like in 2008.

      Last time, the uncertainty of who would be able to pay their debts caused a lot of failures for investors with too much leverage.

  • Well, the risk of financial contagion is likely fairly low in my opinion (for what that is worth). But I am not sure why people are only thinking of it in financial terms. Due to the way the GFC played out perhaps? I do think there is the potential for economic contagion which people here seem to be discounting. Particularly for Australia, we have already seen huge drops in the iron ore price connected to China and the Chinese property market -in the region of 40% from 30-days ago. There is also no reason to think Xi will bail out Evergrande based on my understanding of his economic philosophy, so if Evergrande goes down and takes the property market with it, you can expect this to markedly hurt the Australian economy.

    • +1

      Tourism, tertiary education, barley tariffs and iron ore… We're running out of stuff to sell

      • +1

        Australia is unique
        In that it's number 1 trading import and export partner is also treated as the greatest enemy.

        It's like we want them to be handicapped, but in doing so we handicap ourselves.

  • +2

    When China was building huge cities that no one was living in over 20 years ago, I thought to myself how can this building behometh be sustainable. It was obvious that if it did stop then their economy would suffer…and here we are.

  • +2

    Have any of you seen the YouTube clips where the builders used fake cements and fake metal bars to built the apartments?
    Sounds like conspiracy where they tried to build it half way and then ran away with all the money.

    https://youtu.be/s-2DtL-Wjkc

    • Money first, everything else second.

    • @Lexan - I am sure there's builders in Sydney doing exactly this. Our construction quality and standards, isn't exactly world class.

  • +4

    I read a smug trader comment in the American financial press today about how he expected the CCP will have no choice to bail them out.
    I think that is a tremendous misread of the situation, and he is guilty of assuming the wealthy class in China have the same influence as Wall St does in the US.

    I don’t know if Evergrande will get bailed, but if it does, it will be because doing so benefits China’s position in geopolitics or doing so benefits the Chinese leader’s position of power. If letting it fail hurts western powers more than China, even if a lot of neo-wealthy Chinese get ruined, I would put money on it failing.

    Right now, I expect the Chinese leadership is looking at the list of who loses their money if Evergrande falls over, and if the list contains a lot of western investors, I wouldn’t be surprised to see them get hit.

    Remember too, there are other mechanisms when you hold absolute power. The Chinese could introduce new currency controls, or regulate real estate bond holders can receive no more than 1% interest, or whatever they want.

    Sovereign risk is very much on the table.

    • -3

      A real estate collapse taking down the banks because of bad debt is the reason why Satoshi created digital gold.

      A second real estate collapse taking down more banks will validate his work as to why it was needed in the first place.

      Governments keep printing more money thinking it will save them from bad debt but it only creates a black hole that they can never escape.

  • Waiting for techlead's comment

  • +1
    • maybe I should've put a 5th option for "gentle government supported collapse"

  • China will not allow this to affect their economy, and thus keep it stable.
    There are many equally unstable sectors, computer chips, shipping containers, and the like. Its all just at a bottle knock waiting to blossom.

  • Forget about money … forget about COVID … forget about vaccines … now it is … EARTHQUAKES!!

    We are all going to die …

    (eventually :-)

  • seems like this whole Evergrande thing blew over in like 2 days. Markets & media all rosey now.

    • Yes very disappointing the world didn't collapse yesterday. Maybe Whiterose have different plans for us

  • Nothing to see here, there will be no significant contagion into Western markets. Western bondholders may get shafted in a bailout, but its not going to cause any systematic issues like what Lehman Brothers in the US.

    I bought the dip, enjoying it very much.

  • -1

    Economics 101 - Bailed out by the govt.

    You the think the Chinese govt would allow this to happen & bring them into recession & implode into a global meltdown?

    Much to your dismay, they are not stupid.

    If anything, they will slip money under the table for the Co. to "take care of it".

    All govt's will prop up all markets to stay afloat.

    I'd be more concerned with the hunky dory "she'll be right mentality" we have in AU. Focus on that instead.

    Look at our mortgage crisis, delinquency rates, 90-day arrears. Poor bloke who works at a cafe or retail store has $750K in red next to his name now, just because he put his life savings of 5% down, and wanted to chase the "Australian dream". Poor pensioner at the bank, putting $100/wk away to pay down his mortgage.

    Look at all our student debt, credit card debt, business debt, car finances, BNPL schemes (oh you'll pay later that's for sure).

    Look at ASX during 2020 crash - Biggest V shaped recovery in history (facts).

    Never in my trading life have I seen 40% drops and recover back to all time highs (and even higher highs) in matter of months. That means they moved down/up in total 80% or more. Stonks don't move like that. Not in span of few months.

    That also means incredible dilution + look away, under the table stuff.

    How/why? = Bailed out. From $Trillions that the gvt printed out of thin air. Meanwhile, us chumps sell our souls for the man upstairs for a $, and whilst inflation rises, wages stay stagnant.

    Remember that for the future as well.

    If you want to play this game, play to win.