6 ms·

China’s dodgy-debt double act

52 points by dmagee 5y ago

RileyJames 5y ago
Wondering if this and the everglade situation could be the undoing of tether. Tho Tether seems to be completely disconnected from any sort of reality. Tether is speculated to be backed by a lot of Everglade ‘commercial paper’ debt. https://news.ycombinator.com/item?id=27959852 https://news.ycombinator.com/item?id=27959852
- throwaway4good 5y ago
  It is unrelated. If Tether is to unravel it will happen as the broad cryptocurrency market falls and the outflows into USD becomes larger than the inflow into cryptocurrency (via Tether and other means).
- TheAlchemist 5y ago
  I don't think so. I believe the majority of their commercial paper is in reality IOU to the affiliated exchanges - so money printed from thin air. But I do believe that Tether days are numbered - given the size they reached and the implausibility of the numbers they shared (only beacause they where forced too do so).
- ackbar03 5y ago
  What? As fascinating as this would be the only connection the tweeter makes between the two is that Tether bought a lot of CP and Evergrande happens to need a lot of money. Tweeter needs to get off whatever he's smoking
baybal2 5y ago
The surreally large "shadow debt" that modern China has accumulated was my undergrad essay topic 10 years ago. Since then, it seem to have grown from "surreally large" to "absurdreally large" Go to any big Chinese city. Look around. Every skyscraper around is a mountain of secret debt few times its value. China is really very close to Sri Lanka in how GDP numbers were financially engineered from massive, but well disguised debts on a nation-state scale It is been very, very hard to take money out of China for a few months now. A sign of things soon to come, I believe.
- throwaway4good 5y ago
  So why were you wrong, 10 years ago, when you assumed that the debt burdens were unsustainable?
  - pjc50 5y ago
    Parent didn't use the word unsustainable, merely "large". And remember "Market can remain irrational longer than you can remain solvent"? There's no particular reason why it should "correct" on any particular timescale. Kick the can hard enough and the problem is solved for your lifetime.
    - throwaway4good 5y ago
      What baybal2 writes, he could have written 10 years ago, heck even 20 years ago. And it would a common view on the state of Chinese economy. Yet through this period China has grown 5-10% pa. "A sign of things soon to come, I believe." it says. Nah. The debt will be restructured in some backroom deal. Maybe the central bank lending rates will be lowered a bit. And in ten years the GDP per person in China will have doubled again and all those high rise buildings will be full with people.
  - baybal2 5y ago
    These 10 years proved me wrong, and am not sharing much of the optimist opinion in other replies. I envisioned a scenario of some "backroom deal" at a great public expense, and indeed something like that did happen. It didn't work. Well in a sense, there were giant bailouts, but that only fired up the furnace, and even more "stealth debt" entered the economy. China has a few thousands more of Evergrandes, and HNAs lined up. I bet it will never be fixed within the lifetime of regime, even at the expense of its interest in self-preservation. And it's because Evergrandes, and HNAs are largely CPC's own making — these companies are the biggest sources of income for local governments, and families of high rank communists: defraud lenders, buy overpriced land from local governments, and hide it super duper well, so your mountain of debt turns into asset, seemingly legitely enriching kids of party members on your board. It's a very strange scheme of state authorised credit fraud on a nation scale.
echelon 5y ago
Is there any way to short evergrande, buy puts, etc.? I didn't find them listed in my brokerage. Is smart money already doing so? Any other dominos that will fall because of this, and similar plays to take advantage of them?
- TheAlchemist 5y ago
  You are a bit late in the game. Their bonds are already trading at a 75% discount and the stock is down 80% this year. As a general rule, you shouldn't trade on news like this, unless you understand really well the risks you are taking.
- throwaway4good 5y ago
  Timinig issues aside. Typically you cannot short something like this directly. But you can do it indirectly by going after ie. suppliers. For example short the Aussie dollar.
- unmole 5y ago
  Buy puts on any Chinese ETF?
- sparsely 5y ago
  "Smart" money has been betting against Evergrande for years, and losing money on it until very recently. I heard of one asset manager who in hindsight was totally correct about the fundamentals give up trading them at all, they so consistently lost so much money on it (the market can stay irrational etc.). It's a dangerous game! Mike Bird at the WSJ has been going on about this for years as well.
askmike 5y ago
https://archive.is/XyoLF https://archive.is/XyoLF
yborg 5y ago
>Both episodes show that the hierarchy of creditors in China is based on politics and the priorities of the state The 2008 financial crisis showed that the same is true of Western nations. US and European central banks absorbed trillions in bad debt, and a few banks that officials didn't like walked the plank while the majority came out ahead in the end. The same dynamic is of course 'bold decisive action' when free market capitalists do it, and 'dodgy' when "communists" are engaging in it, at least in the pages of The Economist.
throwaway4good 5y ago
It seems like the Chinese authorities are trying to deleverage by explicit policy (very evident in the stock market), here when the leverage in the western economies is at its highest. We in the west have a tendency to overestimate China's debt problems by comparing the numbers and ratios to that of the west. Forgetting that 1) China is very big and has a lot of people 2) most people in China are poor and live essentially in a third-world economy that can grow very fast by basic investment in infrastructure such as transportation, housing, energy, education.
- another_story 5y ago
  They have been investing in infrastructure, housing and energy. The return on that investment has been decreasing. The CCP has been kicking the can down the road as best it can trying to maintain growth numbers, which in part acts as justification for its single party rule.
  - throwaway4good 5y ago
    You (and most other western commentators) underestimate just how long the road is.
    - starfallg 5y ago
      China is rapidly heading towards the middle-income trap. All of the positioning in the past decade is in the hope of avoiding it. This is a massive challenge as the prosperity of the upper classes is based on cheap labour. All of the advanced economies overcame this by moving jobs up the value chain. China can't easily to do this due to its massive population, a large part of not very well educated. There is a real risk of social instability when semi-skilled jobs dry up.
      - dragonelite 5y ago
        I 100% believe that the main reason a country stays stuck in the middle income trap is its capability to create high tech IP which the nation can use to suck up what I would a global rent for lending out its IP. That why the patent system is so toxic for the global south its like cutting off the steps on the value chain stair.
chunghuaming 5y ago
Chinese citizen living in US, posting anonymously for obvious reason. Huarong and evergrande are just the tip of the iceberg. If you wish to know what all the things fester below for CCP, here's a very timely summary video from laowhy86, one of the YouTube expert on China https://www.youtube.com/watch?v=RpwtZLzDM_o https://www.youtube.com/watch?v=RpwtZLzDM_o Unfortunately you will not find many outspoken Chinese native citizen on YouTube, for they all fear CCP retribution, even living abroad. 恒大暴雷市值两万亿的中国第一房企居然对付不出400亿如同一个万元户被400块给逼死了房企都要塌了房价还没跌建筑商的商票拖欠银行的债务拖欠私人借贷也拖欠房子卖出去还收的是全款不知道这些钱都到哪去了魔幻的时代魔幻的故事啊
- hikingsimulator 5y ago
  Having watched that video, laowhy presents a biased view on the topic. Not a biased view of China mind you, but because his views echo the triumphant 90s zeitgest that capitalism, liberalism, and what can be cast as a "laissez-faire" attitude (supposedly being necessary to the development of a country) is for him the de-facto aka obvious best system. The underlying thread is still that "Fukuyama take" that capitalism and liberalism are the end-of-history. Laowhy provides a compelling narrative, but it also feels like it is just that: a narrative. China as a country has endured and has at hand many more tools to ensure its stability. It is not a simple dictature or the USSR, which could be brought to its knees via a mix of political and economic ostracism. The video sadly feels like some feel-good geopolitical video for westerners: "don't worry about China because China worries about itself and hides it, badly".
  - enaaem 5y ago
    Are there any specific points in the video you disagree with? Just saying something is biased does not make you correct. It is just very elaborate way to say “oh no it isn’t!”.
    - throw3434053 5y ago
      Laowhy only offers this slimey smug clickbait view of China that is exactly what American powers want people to believe. He is constantly releasing videos saying "China will fall any day now!", it is just giving people what they want to hear and it's totally reasonable for this person to point out how biased and uncritical he is.
roenxi 5y ago
We live in very exciting times. The question isn't "Is China's economy good?" or "Is China's economy bad?". The question is "How will it perform relative to Europe and America?". The US's economic fundementals aren't great. I'm expecting to see US government spending be the majority of GDP in my lifetime. That sort of centralised planning doesn't bode well for the West.
- quincunx 5y ago
  So I thought "gov't spending, majority of GDP" was preposterous, but then I looked at the graph at https://en.wikipedia.org/wiki/Government_spending_in_the_United_States https://en.wikipedia.org/wiki/Government_spending_in_the_Uni... Looks like it already blipped the 50% mark in WW2 and is quite close now. Seems to (visually) be leveling though.
  - imtringued 5y ago
    What is preposterous about it? If anything we can probably guess that the 40s to 80s were so nice because government spending went up. The 2008 blip was just the bank bailout. It looks like government spending has stabilized 40 years ago. Considering how much the economy got "worse" from the perspective of the average because China got more powerful since 2000 it's actually strange how the numbers remained stable.
    - quincunx 5y ago
      What is preposterous about it? You mean why I felt it was preposterous? Well allow me to demonstrate my naivety... I would have expected 50% to be "socialist Europe" type spending, and indeed, a bit of googling reveals France is at about 60% of GDP right now, Germany at about 50%, Netherlands at 47%... That 60% of all income is determined by the policies and decision making of politicians, apparatchiks and bureaucrats is, I find, shockingly close to a planned economy. So why preposterous? Because the US, on so many fronts, positions itself in contrast to Europe - free market ideology, small government rhetoric, fiscally conservative. Anyway, obviously, I was wrong.
guerby 5y ago
Perspectives : "The level of debt is jaw-dropping. The private non-financial sector owed the equivalent of 222% of GDP at the end of 2020. Most of that sits with companies. By comparison, private non-financial debt in America is 164% of GDP." GDP per capita China : https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=CN https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?location... 2010 4550 USD (current) 2020 10500 USD (current) USA GDP per capita https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=US https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?location... 2010 48466 USD (current) 2020 63543 USD (current)
- thaumasiotes 5y ago
  > "The level of debt is jaw-dropping. The private non-financial sector owed the equivalent of 222% of GDP at the end of 2020. Most of that sits with companies. By comparison, private non-financial debt in America is 164% of GDP." So they have about a third more debt than we do? "Jaw-dropping" seems like an overstatement.
  - DisjointedHunt 5y ago
    The US Dollar is the primary currency in which trade is conducted in much of the world. The US banking and financial system has much of the most powerful entities in the world relying on it for their future financial gains. China, by comparison is a relatively more fragile economy with much of the growth there coming from manufacturing and real estate , both of which are sectors that are starting to struggle because, either there's pressure to move manufacturing away from external forces or internal force in China are clamping down on real estate speculation to free up the capital allocation crisis there where people would rather put their money on brick and concrete rather than back scientific innovation or commercial enterprise. In short, the US can print $4-$5 Trillion dollars and get away with it while China simply does not enjoy the same luxury.
    - guerby 5y ago
      China has currently 3.2 trillions USD worth of foreign currency reserves https://tradingeconomics.com/china/foreign-exchange-reserves https://tradingeconomics.com/china/foreign-exchange-reserves (And 0.1 trillions in gold reserves FWIW.)
christophilus 5y ago
This was covered on yesterday's Real Vision Daily Briefing[0]. It does feel like it could be China's Lehman moment. We'll have to wait and see. There seem to be a lot of cracks and fraying in China's economy at the moment, and it feels like the sort of thing that could bring on a global economic crisis, if not handled with care. [0] https://www.youtube.com/watch?v=_w8twoGZR_Q https://www.youtube.com/watch?v=_w8twoGZR_Q

52 points by dmagee 5y ago

Wondering if this and the everglade situation could be the undoing of tether. Tho Tether seems to be completely disconnected from any sort of reality. Tether is speculated to be backed by a lot of Everglade ‘commercial paper’ debt. https://news.ycombinator.com/item?id=27959852 https://news.ycombinator.com/item?id=27959852

throwaway4good 5y ago
It is unrelated. If Tether is to unravel it will happen as the broad cryptocurrency market falls and the outflows into USD becomes larger than the inflow into cryptocurrency (via Tether and other means).
TheAlchemist 5y ago
I don't think so. I believe the majority of their commercial paper is in reality IOU to the affiliated exchanges - so money printed from thin air. But I do believe that Tether days are numbered - given the size they reached and the implausibility of the numbers they shared (only beacause they where forced too do so).
ackbar03 5y ago
What? As fascinating as this would be the only connection the tweeter makes between the two is that Tether bought a lot of CP and Evergrande happens to need a lot of money. Tweeter needs to get off whatever he's smoking

baybal2 5y ago

The surreally large "shadow debt" that modern China has accumulated was my undergrad essay topic 10 years ago. Since then, it seem to have grown from "surreally large" to "absurdreally large" Go to any big Chinese city. Look around. Every skyscraper around is a mountain of secret debt few times its value. China is really very close to Sri Lanka in how GDP numbers were financially engineered from massive, but well disguised debts on a nation-state scale It is been very, very hard to take money out of China for a few months now. A sign of things soon to come, I believe.

throwaway4good 5y ago
So why were you wrong, 10 years ago, when you assumed that the debt burdens were unsustainable?
- pjc50 5y ago
  Parent didn't use the word unsustainable, merely "large". And remember "Market can remain irrational longer than you can remain solvent"? There's no particular reason why it should "correct" on any particular timescale. Kick the can hard enough and the problem is solved for your lifetime.
  - throwaway4good 5y ago
    What baybal2 writes, he could have written 10 years ago, heck even 20 years ago. And it would a common view on the state of Chinese economy. Yet through this period China has grown 5-10% pa. "A sign of things soon to come, I believe." it says. Nah. The debt will be restructured in some backroom deal. Maybe the central bank lending rates will be lowered a bit. And in ten years the GDP per person in China will have doubled again and all those high rise buildings will be full with people.
- baybal2 5y ago
  These 10 years proved me wrong, and am not sharing much of the optimist opinion in other replies. I envisioned a scenario of some "backroom deal" at a great public expense, and indeed something like that did happen. It didn't work. Well in a sense, there were giant bailouts, but that only fired up the furnace, and even more "stealth debt" entered the economy. China has a few thousands more of Evergrandes, and HNAs lined up. I bet it will never be fixed within the lifetime of regime, even at the expense of its interest in self-preservation. And it's because Evergrandes, and HNAs are largely CPC's own making — these companies are the biggest sources of income for local governments, and families of high rank communists: defraud lenders, buy overpriced land from local governments, and hide it super duper well, so your mountain of debt turns into asset, seemingly legitely enriching kids of party members on your board. It's a very strange scheme of state authorised credit fraud on a nation scale.

echelon 5y ago

Is there any way to short evergrande, buy puts, etc.? I didn't find them listed in my brokerage. Is smart money already doing so? Any other dominos that will fall because of this, and similar plays to take advantage of them?

TheAlchemist 5y ago
You are a bit late in the game. Their bonds are already trading at a 75% discount and the stock is down 80% this year. As a general rule, you shouldn't trade on news like this, unless you understand really well the risks you are taking.
throwaway4good 5y ago
Timinig issues aside. Typically you cannot short something like this directly. But you can do it indirectly by going after ie. suppliers. For example short the Aussie dollar.
unmole 5y ago
Buy puts on any Chinese ETF?
sparsely 5y ago
"Smart" money has been betting against Evergrande for years, and losing money on it until very recently. I heard of one asset manager who in hindsight was totally correct about the fundamentals give up trading them at all, they so consistently lost so much money on it (the market can stay irrational etc.). It's a dangerous game! Mike Bird at the WSJ has been going on about this for years as well.

askmike 5y ago

https://archive.is/XyoLF https://archive.is/XyoLF

yborg 5y ago

>Both episodes show that the hierarchy of creditors in China is based on politics and the priorities of the state The 2008 financial crisis showed that the same is true of Western nations. US and European central banks absorbed trillions in bad debt, and a few banks that officials didn't like walked the plank while the majority came out ahead in the end. The same dynamic is of course 'bold decisive action' when free market capitalists do it, and 'dodgy' when "communists" are engaging in it, at least in the pages of The Economist.

throwaway4good 5y ago

It seems like the Chinese authorities are trying to deleverage by explicit policy (very evident in the stock market), here when the leverage in the western economies is at its highest. We in the west have a tendency to overestimate China's debt problems by comparing the numbers and ratios to that of the west. Forgetting that 1) China is very big and has a lot of people 2) most people in China are poor and live essentially in a third-world economy that can grow very fast by basic investment in infrastructure such as transportation, housing, energy, education.

another_story 5y ago
They have been investing in infrastructure, housing and energy. The return on that investment has been decreasing. The CCP has been kicking the can down the road as best it can trying to maintain growth numbers, which in part acts as justification for its single party rule.
- throwaway4good 5y ago
  You (and most other western commentators) underestimate just how long the road is.
  - starfallg 5y ago
    China is rapidly heading towards the middle-income trap. All of the positioning in the past decade is in the hope of avoiding it. This is a massive challenge as the prosperity of the upper classes is based on cheap labour. All of the advanced economies overcame this by moving jobs up the value chain. China can't easily to do this due to its massive population, a large part of not very well educated. There is a real risk of social instability when semi-skilled jobs dry up.
    - dragonelite 5y ago
      I 100% believe that the main reason a country stays stuck in the middle income trap is its capability to create high tech IP which the nation can use to suck up what I would a global rent for lending out its IP. That why the patent system is so toxic for the global south its like cutting off the steps on the value chain stair.

chunghuaming 5y ago

Chinese citizen living in US, posting anonymously for obvious reason. Huarong and evergrande are just the tip of the iceberg. If you wish to know what all the things fester below for CCP, here's a very timely summary video from laowhy86, one of the YouTube expert on China https://www.youtube.com/watch?v=RpwtZLzDM_o https://www.youtube.com/watch?v=RpwtZLzDM_o Unfortunately you will not find many outspoken Chinese native citizen on YouTube, for they all fear CCP retribution, even living abroad. 恒大暴雷市值两万亿的中国第一房企居然对付不出400亿如同一个万元户被400块给逼死了房企都要塌了房价还没跌建筑商的商票拖欠银行的债务拖欠私人借贷也拖欠房子卖出去还收的是全款不知道这些钱都到哪去了魔幻的时代魔幻的故事啊

hikingsimulator 5y ago
Having watched that video, laowhy presents a biased view on the topic. Not a biased view of China mind you, but because his views echo the triumphant 90s zeitgest that capitalism, liberalism, and what can be cast as a "laissez-faire" attitude (supposedly being necessary to the development of a country) is for him the de-facto aka obvious best system. The underlying thread is still that "Fukuyama take" that capitalism and liberalism are the end-of-history. Laowhy provides a compelling narrative, but it also feels like it is just that: a narrative. China as a country has endured and has at hand many more tools to ensure its stability. It is not a simple dictature or the USSR, which could be brought to its knees via a mix of political and economic ostracism. The video sadly feels like some feel-good geopolitical video for westerners: "don't worry about China because China worries about itself and hides it, badly".
- enaaem 5y ago
  Are there any specific points in the video you disagree with? Just saying something is biased does not make you correct. It is just very elaborate way to say “oh no it isn’t!”.
  - throw3434053 5y ago
    Laowhy only offers this slimey smug clickbait view of China that is exactly what American powers want people to believe. He is constantly releasing videos saying "China will fall any day now!", it is just giving people what they want to hear and it's totally reasonable for this person to point out how biased and uncritical he is.

roenxi 5y ago

We live in very exciting times. The question isn't "Is China's economy good?" or "Is China's economy bad?". The question is "How will it perform relative to Europe and America?". The US's economic fundementals aren't great. I'm expecting to see US government spending be the majority of GDP in my lifetime. That sort of centralised planning doesn't bode well for the West.

quincunx 5y ago
So I thought "gov't spending, majority of GDP" was preposterous, but then I looked at the graph at https://en.wikipedia.org/wiki/Government_spending_in_the_United_States https://en.wikipedia.org/wiki/Government_spending_in_the_Uni... Looks like it already blipped the 50% mark in WW2 and is quite close now. Seems to (visually) be leveling though.
- imtringued 5y ago
  What is preposterous about it? If anything we can probably guess that the 40s to 80s were so nice because government spending went up. The 2008 blip was just the bank bailout. It looks like government spending has stabilized 40 years ago. Considering how much the economy got "worse" from the perspective of the average because China got more powerful since 2000 it's actually strange how the numbers remained stable.
  - quincunx 5y ago
    What is preposterous about it? You mean why I felt it was preposterous? Well allow me to demonstrate my naivety... I would have expected 50% to be "socialist Europe" type spending, and indeed, a bit of googling reveals France is at about 60% of GDP right now, Germany at about 50%, Netherlands at 47%... That 60% of all income is determined by the policies and decision making of politicians, apparatchiks and bureaucrats is, I find, shockingly close to a planned economy. So why preposterous? Because the US, on so many fronts, positions itself in contrast to Europe - free market ideology, small government rhetoric, fiscally conservative. Anyway, obviously, I was wrong.

guerby 5y ago

Perspectives : "The level of debt is jaw-dropping. The private non-financial sector owed the equivalent of 222% of GDP at the end of 2020. Most of that sits with companies. By comparison, private non-financial debt in America is 164% of GDP." GDP per capita China : https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=CN https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?location... 2010 4550 USD (current) 2020 10500 USD (current) USA GDP per capita https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=US https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?location... 2010 48466 USD (current) 2020 63543 USD (current)

thaumasiotes 5y ago
> "The level of debt is jaw-dropping. The private non-financial sector owed the equivalent of 222% of GDP at the end of 2020. Most of that sits with companies. By comparison, private non-financial debt in America is 164% of GDP." So they have about a third more debt than we do? "Jaw-dropping" seems like an overstatement.
- DisjointedHunt 5y ago
  The US Dollar is the primary currency in which trade is conducted in much of the world. The US banking and financial system has much of the most powerful entities in the world relying on it for their future financial gains. China, by comparison is a relatively more fragile economy with much of the growth there coming from manufacturing and real estate , both of which are sectors that are starting to struggle because, either there's pressure to move manufacturing away from external forces or internal force in China are clamping down on real estate speculation to free up the capital allocation crisis there where people would rather put their money on brick and concrete rather than back scientific innovation or commercial enterprise. In short, the US can print $4-$5 Trillion dollars and get away with it while China simply does not enjoy the same luxury.
  - guerby 5y ago
    China has currently 3.2 trillions USD worth of foreign currency reserves https://tradingeconomics.com/china/foreign-exchange-reserves https://tradingeconomics.com/china/foreign-exchange-reserves (And 0.1 trillions in gold reserves FWIW.)

christophilus 5y ago

This was covered on yesterday's Real Vision Daily Briefing[0]. It does feel like it could be China's Lehman moment. We'll have to wait and see. There seem to be a lot of cracks and fraying in China's economy at the moment, and it feels like the sort of thing that could bring on a global economic crisis, if not handled with care. [0] https://www.youtube.com/watch?v=_w8twoGZR_Q https://www.youtube.com/watch?v=_w8twoGZR_Q