Good Friday Morning and I suppose congrats are in order for the FDA and CDC to get their act together and authorize boosters and child vaccines over the last few weeks. The public debates they engaged in, first telling people no, then caving and allowing boosters across the board, and finally making headway on vaccinating children (data they’ve had for months now). If there’s one area where the Biden administration has failed, it’s been in continuing the push from Operation Warp Speed to cut ineffective agency regulation.
But they’ve finally come to their senses, nearly a year after the first vaccines received their first authorizations. As with everything on this pandemic, especially the vaccines, Israel has led the way on data. Israeli studies have shown the booster shots helped decrease case numbers and reduce hospitalizations of COVID-19.
For my part, I plan on getting a booster. I haven’t set a date yet, but I don’t plan on overthinking it. Despite the worst rollout and marketing campaign from the current administration I’ve ever seen, the vaccines work. I thought about getting a blood test for antibodies for a while, but I don’t see a need at this rate. The Israeli data is enough, the vaccines are free, and I don’t want to make a decision based on my hardened belief the administration is undermining the nation’s pandemic response at every turn. And I’m not going to embrace a rejection of a vaccine based on rejecting Joe Biden’s stupidity (let’s go, Brandon, indeed).
Also, I hate masks. I don’t understand anyone who enjoys them. And I enjoy not thinking about the pandemic at all. There’s a legitimate discussion to be had over active antibodies versus memory cells, but I don’t care about figuring that out until this thing is endemic (which I suspect will occur after this upcoming winter surge).
This week, I’m taking the deep dive I threatened last week into China and the Evergrande liquidity crisis. I’ve done this on the podcasts, and I’m writing about it this week. There were some critical developments ahead of the default that was supposed to happen this week—links to follow.
Where you can find me this week
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After Gruden, NFL must release all the documents – The Conservative Institute.
Biden’s inflation problem isn’t transitory – The Conservative Institute.
The Evergrande liquidity crisis and how China is avoiding crisis this week.
I’ve spent two podcasts talking about the Evergrande liquidity crisis. I figure it’s time to dive in here because there are fascinating developments to cover and ramifications to explore.
For those who don’t listen or need a quick refresher, the Evergrande liquidity crisis is essentially China’s version of the 2008 real estate housing bubble collapse in the United States. Whether China’s version of this goes that far is still TBD — but the ingredients are there for this to happen. Evergrande is the largest company involved and the equivalent of a Lehman Brothers or a Merril Lynch at the beginning of the 2008 financial crisis.
Why does it matter for us? The United States is experiencing an unprecedented surge in economic demand, and people want to buy stuff. At the same time, because of the pandemic, the global supply chain is still mucked up beyond all repair. It went from a historic drop in demand and meeting new kinds of pandemic-specific requests to everything exploding back to normal at once. A significant portion of the US supply chain runs through China, and an economic slowdown in China would unquestionably impact the US, particularly the capacity of the supply chain in China to respond.
In other words, supply could shrink in China, causing more price increases here (among other things). It’s not just the United States. Other countries are impacted as well, most notably Australia.
Where we’ve been so far is Evergrande has been missing payments on its debt for the last month. After missing the first payment, it gets a 30 day grace period to cover. After the end of that grace period, Evergrande is in default. The first potential default was lined up for October 23.
To pay those debts, Evergrande has attempted to sell off various parts of its assets. Everything Evergrande has done to sell off assets to cover debts has failed thus far. That’s led everyone up to this October 23 date as the default date. But right at the buzzer, when Evergrande faced this decision, they received an unexpected reprieve. First, they got an extension. Reuters explains:
A source familiar with the matter said Evergrande Chairman Hui Ka Yan had agreed to pump personal wealth into a Chinese residential project tied to the bond to ensure it gets completed, paving the way for bondholders to get their dues.
The bondholders agreed to the proposal to avoid a messy collapse of the developer or a drawn-out legal battle, the source told Reuters. Evergrande did not respond to Reuters requests for comment.
The development comes just ahead of the expiry of a 30-day grace period for Evergrande to pay $83.5 million in coupon payments for an offshore bond, at which time, if it cannot pay, China’s most indebted developer would be considered in default.
Evergrande, in an exchange filing on Wednesday, said the grace periods for the payment of the interest on its U.S. dollar-denominated bonds that were due in September and October had not expired. It did not elaborate.
That last part is confusing and has made little sense to most observers. How it’s true that bonds haven’t expired is impossible to know at this stage.
The second thing that’s happened, Evergrande shockingly made a payment on the debt due this week. From the WSJ:
China Evergrande Group made an overdue interest payment to international bondholders, the state-owned Securities Times reported Friday, an unexpected move that allows the struggling property giant to stave off a default.
The Chinese real-estate developer on Thursday sent $83.5 million to the trustee for the dollar bonds, and that financial institution will in turn pay bondholders, the Securities Times reported. The financial paper is run by the Communist Party’s flagship People’s Daily newspaper.
Evergrande was nearing the end of a 30-day grace period before bondholders could send a notice of default to the company, after it failed to make the interest payment on about $2.03 billion of dollar bonds on Sept. 23.
A default on those bonds would likely have spiraled into the biggest corporate default in Asia, by enabling creditors to declare defaults on some of Evergrande’s other debts. The company is one of China’s biggest developers, and its most indebted. It had the equivalent of more than $300 billion in total liabilities, including some $89 billion in interest-bearing debt, as of end-June.
It’s worth noting, all this information is from Chinese state media. None of it has been confirmed by US media or its sources. As a result, though, shares of Evergrande and the property sector, in general, popped up in Asia markets after this news broke.
In short, Evergrande has bought itself time. How much? That’s to be determined. Other debts are due in the next few months, and no clear explanation of how Evergrande escapes without defaulting. Maybe it continues pulling rabbits out of a hat for the foreseeable future, but nothing in the present is encouraging. Everyone still anticipates some kind of default.
And that’s because Evergrande’s sales have dried up to nothing. This from WSJ’s Heard on the Street:
The company’s contract sales from Sept. 1 to Oct. 20 were only 3.65 billion yuan, equivalent to about $571 million, it said Wednesday. This includes the value of apartments it delivered to suppliers and contractors in lieu of repayment. That represents at least a 97% drop from last year, when its contract sales for Sept. 1 to Oct. 8 were 141.6 billion yuan.
Evergrande’s other asset-sale plans are seemingly going nowhere too. That includes its plan to sell its office building in Hong Kong. The developer bought the building from its longtime business partner Chinese Estates for $1.6 billion in 2015, which set a record of the most expensive office-building transaction in the city at that time. Nobody seems interested in buying its electric-vehicle subsidiary, which is mostly an indebted company yet to produce a single car, either.
I want you to think about that for a second. Imagine losing 97% of all your contract sales as a real estate company. Real estate and energy companies have cratered across the board in China, leading to much slower economic growth. It’s no wonder that before Evergrade had its shares halted on trading markets, they’d already lost 80% of their value in the last six months. When Evergrande allowed trading to resume this week, just ahead of its ability to pay off a debt, which should tell you how honest they’re being, shares dropped another 10+% from that value.
Evergrande is the big kahuna in all this, but all the smaller companies underneath it are struggling too. Several have defaulted or asked for extensions. Numerous others have crossed lines and regulations set by the Chinese Communist Party.
What next? I found this article from an Australian columnist helpful. She starts by noting that if property prices drop due to Evergrande and its competitors going under, it will lead to more problems. Crashing property values means more people are underwater, having paid more money than what the property is worth. She writes:
While the Evergrande situation was already a crisis, Mr Bennett predicted things will get much worse if property prices were to experience even greater drops.
“There are the very first signs of that actually happening with prices in the 70 largest cities just reported to have fallen 0.8 per cent. Not a big deal, except they used to rise steadily and impressively. Something is happening that is more profound than a short term situation of one or two large developers being in trouble,” he explained.
“They are the canary in the mine. They are faltering because the easy win path of the incredible China boom of past decades, is beginning to settle back into a more typical pattern of a mature capitalist economy.”
Mr Bennett added that China, the world’s second largest economy, could well be having a US style property speculation bubble burst experience.
“In the original GFC, high lending to all kinds of construction and property investment (in the US) lead to a global financial crisis. China was actually the backstay then to the global economy,” he noted.
He added that China’s continued strong growth during the GFC and the impact that had on all of Asia and Australia, certainly supported the region during the severe USA and European downturn.
So China’s potential downturn could spell bad news for Australia considering it makes billions from the relationship, despite the trade relationships being frosty at times.
To add to that the US economy is in the grip of a serious slow down with US mortgage applications suffered another severe contraction, he added.
“We should pay attention to any further decline in Chinese property prices, and be particularly concerned should the boom in US prices begin at any stage to slow or reverse,” he said. “Mortgage applications, are as I have said for some time, a major warning sign.”
Another report out of Australia showed ghost constructions sites, owned by Evergrande, all but abandoned and empty now. So while the Chinese Communist Party and state media are painting a pleasant picture of things being under control, a mere look behind the curtain suggests something much worse. And if there is a crash, you may hide it from the world, but you can’t hide it from your people who watch the values of their homes and properties crash through the floor.
China has already started censoring public social media sites, getting rid of anything that could cause a public panic. These are not the things a confidence regime does on the brink of a financial crisis.
To that end, it appears that the head of the Chinese Communist Party, Xi Jinping, is pivoting the country towards a leaner economic message. In a speech that was translated, he said:
Common prosperity is an essential requirement of socialism and an important feature of Chinese-style modernisation. The common prosperity we are talking about is the common prosperity of all people. It is the prosperity of all people in their material and spiritual [and moral] lives. Common prosperity does not mean prosperity for a [selected] few, nor is it neat and tidy egalitarianism.
He added the following:
We must base ourselves on the primary stage of socialism and adhere to the “Two Unswervingly” principle. [That is to say], we must maintain the public ownership system as the mainstay and simultaneously develop the economics of a variety of ownership systems. While giving full play to the important role of the public sector economy in driving common prosperity, we must also promote the healthy development of the non-public sector economy and the healthy growth of its members. While we should allow some people to get rich first, it should be emphasised that those who become rich first [shall] lead and assist those who are not yet rich. We shall focus on encouraging industriousness, legal business operations, and those leaders of wealth acquisition who dare to pioneer. Getting rich by underhand means shall not be supported, and those who break the law and violate regulations must be dealt with according to the law.
If you’ve studied any communist society over time, when the government is seeking to publically own everything and get rid of what they define as “corruption,” political opponents of the central leader have a high likelihood of “disappearing.” As I’ve suggested on the podcast, with a leadership vote up next year, they could use this corruption line as a way to cast blame for an economic downturn on Xi’s opponents and then pivot the country towards this “common prosperity” goal.
That’s a clean way to handle an economic downturn that China has believed was coming for a while. But, of course, economic downturns can also make any society shakier and harder to predict. The best-laid plans can collapse if a downturn goes sideways on the government.
Xi holds all the cards now, and the government is doing its best to hide Evergrande’s struggles. They followed a similar playbook on the pandemic. For now, we have a reprieve from another Chinese contagion sweeping the globe. How long they can keep that up remains to be seen. It’s also unknown if the CCP and Xi can contain a public panic — if people lose faith in the CCP, all bets are off.
Links of the week
There is no Russia-China axis – Mark Galeotti, American Spectator
Did a Delta Pilot Collapse and Die Midflight? No. – The Dispatch Factcheck
Does the Pfizer/BioNTech Vaccine Contained Aborted Fetal Cells? No. – The Dispatch Factcheck
Did Kamala Harris’ YouTube Show Feature Child Actors? Yes. – The Dispatch Factcheck
Twitter Thread(s) of the week
Satire of the week
I LIVED IT: My TikTok Was Stitched by a Therapist – Reductress
Thanks for reading!