10 ms·

China defaults hit record in 2018, and the 2019 pace is triple that

191 points by adventured 8y ago

howiroll 8y ago
That’s actually a good thing. Time bombs need to blow up when they are small. Trump is helping China’s economy. By far he’s doing, he’s a savior to them.
baybal2 8y ago
There is certainly a pattern of people posting news about China early in the morning. Edit: yes I mean in US East coast morning.
- Cthulhu_ 8y ago
  And what is the point you're trying to make? China is more than half a day ahead of the US in terms of timezones, meaning that daytime news editors will have gone home by the time the day - and the stream of news - in China begins. At least, that's one explanation; on the other hand I'm sure e.g. Bloomberg's news stream is a 24/7 thing.
- moate 8y ago
  Define "early in the morning". If you mean USA morning, it's probably because there are people in China posting about this. If you mean China morning, it's probably because there are people in the USA posting about it. This is an international site...
- benj111 8y ago
  What are you implying? There's nothing inherently wrong with Chinese people, or others posting about China. If you're talking about the timing, its probably because the US has been asleep whilst all the news has been happening, and now all the journalists are posting their stories, and people are reading stories and posting them here.
  - baybal2 8y ago
    I'm just noticing that news about current heated debates about China are being posted around 9:00 East Coast time without implying anything
whytaka 8y ago
It seems that this is as intended by the government in a bid to shutter the shadow banking market. The government continues to encourage leverage but only through regulated means. I wonder what defaulting on shadow loans means. What kind of protections are borrowers actually afforded? To what extent will shadow lenders try to recuperate their loans?
baybal2 8y ago
About the news. Well, that's it. After one guzzles on debt which he has no chance to repay, a bankruptcy usually follows. A lot of Chinese elites are financially inept, and that is not limited to only ones who were born before seventies. That twisted version of financial "science" was born during China's nineties, out of numerous "get rich quick" schemes, and is now being taught as "the new truth" in reputable Chinese business schools. The few companies from that era that managed to miraculously survive and turn into more or less normal profitable enterprises were then labelled as "examples to emulate," to disastrous results... Lenovo (a huge real estate player in China,) HNA, Wanda, Oceanwide-Minsheng, Guotai Junan, Poly, Fosun, Pingan... all built along the same template: ridiculous real estate investments as a collateral for equally ridiculous loans on which the rest of their group companies run.
AFascistWorld 8y ago
China has estimated 40 trillion yuan of local government debt (no one knows exactly how much), since no one will ever be held accountable for it, cities are essentially borrowing nonstop like there's no tomorrow coz you know free money why not. 贺铿, member of the National People's Congress Financial and Economic Affairs Committee, claims not single one of the cities planned to ever repay. Some even struggle to pay interest.
- metalliqaz 8y ago
  Most of the cities are likely correct, thus they made the correct move. They will be bailed out just as happens everywhere else. Perhaps the central government even likes this arrangement, because it allows them to basically wipe out cities that don't fit into their plans for the future.
  - simonh 8y ago
    You can wipe out the city, but somebody still needs to pay the debts.
    - zeusk 8y ago
      OR, you get a default on that debt (esp. considering the entity is insolvent).
    - cc439 8y ago
      As best as I can tell, the Chinese government's plan is to externalize the effects of all the debts that turn bad. At the end of the day, foreign investment in physical assets (factories, equipment, supply chains, etc) and infrastructure cannot simply be repossessed, especially under the auspices of a fiercely nationalistic and dictatorial Chinese government. If Chinese debt holders are no longer able to meet their obligations, the Chinese government will step in to secure the debts they hold and nationalize/seize whatever valuable assets are held by foreigners, effectively offloading all their financial problems on the rest of the world. What recourse will a company like Apple have against a sovereign nation no longer willing to play by WTO rules since they have grown strong enough to ignore all but the most sincere military threats?
PakG1 8y ago
So I'm doing an MBA right now. Yeah, I know, I know. Anyway, it's a world-ranked program, located in Hong Kong. I will say that I actually have learned a lot, if that makes the below easier to believe. One of my classmates is a senior finance manager or something for a Chinese real estate company. Just finished a macro economics class where the professor identified various issues and risks around the world and particularly identified corporate debt and real estate prices (among other things) as being a really big risk in China. He also happens to get invited to advise the top of the top levels of the Chinese government on their economic planning, so he very much has a horse in this race. So my real estate finance manager classmate objected to real estate prices being a risk. She told the professor in front of the class that if things ever get bad, the Chinese government will step in and take care of everyone. This prof advises the government about their economic risks and she's telling him there's no risk. I have no idea what to think anymore. The world is crazy.
- onlyrealcuzzo 8y ago
  If Kyle Bass is right about China's twin deficit: If oil prices stay above $60 OR the U.S. keeps tariffs on China OR there is a global slowdown: Chinese (and especially Hong Kong) real estate is in for a really bad time. I want to point out, this isn't doom and gloom. Although China has a 90%! home ownership rate, prices could collapse 90% (they won't), and it would only affect speculators and people who bought their first home in the last 5 years (almost no one. No ordinary person can afford a first home). See the 45 minute interview here: https://www.realvision.com/tv/shows/interviews/videos/chinas-currency-cliff https://www.realvision.com/tv/shows/interviews/videos/chinas...
  - adventured 8y ago
    > prices could collapse 90% (they won't), and it would only affect speculators and people who bought their first home in the last 5 years How do you arrive at that claim? ~78% of all household assets in urban China are held in residential housing ownership. A 90% housing price collapse would be beyond catastrophic to China's economy and household wealth across the board. In rural China, residential housing values represent ~65% of household wealth. China's household assets being so extremely concentrated to housing is unique among major economies. In the US, the residential real-estate market represents closer to 35% of household assets (in the UK it's around 50%). Financial assets are only 12% of urban Chinese household assets, compared to 43% in the US. China can't afford anything to go wrong in their residential housing market, much less a 90% price decline.
duxup 8y ago
Some random questions I always wonder: Do we really have reliable numbers as far as public debt in China AND what the central government has as far as money, and what they could do about it? Could China now be large enough that they could just ... cancel some debt and tell the world "That's right, we did it, you gonna just not do business in China?"
- onlyrealcuzzo 8y ago
  No. The US can't do that. And the US is bigger than China. No one is so big that they can remit their debts and still get low interest loans. Of course China could raise their taxes to pay for their spending, or they could keep printing money and devalue their currency. But no one can not pay debt and keep getting low interest rate loans.
  - dageshi 8y ago
    I think they can when the vast majority of the debt (nearly all of it) is locally owned and denominated in their own currency. What stops them simply saying "all this debt we owe to ourselves is cancelled"?
    - DeonPenny 8y ago
      Vast inflation, being label a currency manipulator, tariffs, and basically stealing most of chinas household income and giving it to corporate would leave a sour taste in their citizen's mouth causing unrest.
    - onlyrealcuzzo 8y ago
      The same thing that stops the Federal Reserve from doing that. You can't get something from nothing. If the market has priced in that $30T is on reserve, and you just say, lol nvm -- you get incredibly fast inflation. The market reacts to that $30T not being priced in anymore.
      - dageshi 8y ago
MR4D 8y ago
China's goal is to eliminate social upheaval, mostly centered on the concept of full employment. Without it, the country risks social upheaval. Their second goal is a growing economy, so that the people can be richer, on the thinking that richer people have more to lose, and less like to cause social upheaval. The end result of this is that China will continue to contort itself to satisfy its goal. Just like the Thanksgiving Turkey, this works great...right up until it doesn't. What I hope HN people are doing in the background is contemplating what happens on that Day of Reckoning, and how it impacts them and their lives. If that day happened tomorrow, commodity prices would drop across the board. Oil would drop, as would gas, coal, grains, livestock. That would be great (unless you are employed in those industries). Then, real estate prices will drop, as the Chinese trying to get money out of the country won't be able to (it likely will be devalued, and possibly near worthless). Vancouver, and Canadian real estate in general will have price collapses. This will cause Canadian bank failures, and dry up credit in Canada. Meanwhile, companies with significant exposure in China will see their stock drop. Cash flow will be reduced, and for some, significantly. Assets may have to be marked-down to lower book values. Further, the companies that depend on the aforementioned firms will endure hardships of product logistics - manufacturing, inventory, and quality control will all go a little haywire. Firms that can move their supply chains out of China quickly will do so, helping various other countries. But countries that have significant percentages of their GDP devoted to raw materials production (such as Africa, the Arabian peninsula, Russia, and Australia) will go into recession, and some into depression. That will result in a drying up of global capital (probably quickly, as bankers run faster than most when they hear canaries chirp), and global shipping. I could go on, but you get the idea. So much of our lives (wherever we live) depend on supply chains that either run through China, or are significantly affected by China (like concrete and steel), that we are all going to be effected, and economically speaking, it won't be pretty for the world.
- yeahitslikethat 8y ago
  What's the time line on this getting started? What's the best strategy for investing? Asset allocation? To be specific Near term: < 6 months Short term: 6 Mos - 2 yrs Midterm: 2 years - 5 yrs Long term: 5 years or more what you're predicting here is in line with mine, but yours is way more well thought out ... and globally catastrophic. Where can money be spent right now as an investment?
zachguo 8y ago
Why China's Bonds Are Defaulting at a Record Pace https://www.bloomberg.com/news/articles/2019-02-20/why-china-s-bonds-are-defaulting-at-a-record-pace-quicktake https://www.bloomberg.com/news/articles/2019-02-20/why-china...
toomanyrichies 8y ago
If someone wanted to price this into their models, where should their short and long positions be if they assume a massive financial crisis in China within the next (say) 10 years? Asking for a friend. :-)

191 points by adventured 8y ago

That’s actually a good thing. Time bombs need to blow up when they are small. Trump is helping China’s economy. By far he’s doing, he’s a savior to them.

baybal2 8y ago

There is certainly a pattern of people posting news about China early in the morning. Edit: yes I mean in US East coast morning.

Cthulhu_ 8y ago
And what is the point you're trying to make? China is more than half a day ahead of the US in terms of timezones, meaning that daytime news editors will have gone home by the time the day - and the stream of news - in China begins. At least, that's one explanation; on the other hand I'm sure e.g. Bloomberg's news stream is a 24/7 thing.
moate 8y ago
Define "early in the morning". If you mean USA morning, it's probably because there are people in China posting about this. If you mean China morning, it's probably because there are people in the USA posting about it. This is an international site...
benj111 8y ago
What are you implying? There's nothing inherently wrong with Chinese people, or others posting about China. If you're talking about the timing, its probably because the US has been asleep whilst all the news has been happening, and now all the journalists are posting their stories, and people are reading stories and posting them here.
- baybal2 8y ago
  I'm just noticing that news about current heated debates about China are being posted around 9:00 East Coast time without implying anything

whytaka 8y ago

It seems that this is as intended by the government in a bid to shutter the shadow banking market. The government continues to encourage leverage but only through regulated means. I wonder what defaulting on shadow loans means. What kind of protections are borrowers actually afforded? To what extent will shadow lenders try to recuperate their loans?

baybal2 8y ago

About the news. Well, that's it. After one guzzles on debt which he has no chance to repay, a bankruptcy usually follows. A lot of Chinese elites are financially inept, and that is not limited to only ones who were born before seventies. That twisted version of financial "science" was born during China's nineties, out of numerous "get rich quick" schemes, and is now being taught as "the new truth" in reputable Chinese business schools. The few companies from that era that managed to miraculously survive and turn into more or less normal profitable enterprises were then labelled as "examples to emulate," to disastrous results... Lenovo (a huge real estate player in China,) HNA, Wanda, Oceanwide-Minsheng, Guotai Junan, Poly, Fosun, Pingan... all built along the same template: ridiculous real estate investments as a collateral for equally ridiculous loans on which the rest of their group companies run.

AFascistWorld 8y ago

China has estimated 40 trillion yuan of local government debt (no one knows exactly how much), since no one will ever be held accountable for it, cities are essentially borrowing nonstop like there's no tomorrow coz you know free money why not. 贺铿, member of the National People's Congress Financial and Economic Affairs Committee, claims not single one of the cities planned to ever repay. Some even struggle to pay interest.

metalliqaz 8y ago
Most of the cities are likely correct, thus they made the correct move. They will be bailed out just as happens everywhere else. Perhaps the central government even likes this arrangement, because it allows them to basically wipe out cities that don't fit into their plans for the future.
- simonh 8y ago
  You can wipe out the city, but somebody still needs to pay the debts.
  - zeusk 8y ago
    OR, you get a default on that debt (esp. considering the entity is insolvent).
  - cc439 8y ago
    As best as I can tell, the Chinese government's plan is to externalize the effects of all the debts that turn bad. At the end of the day, foreign investment in physical assets (factories, equipment, supply chains, etc) and infrastructure cannot simply be repossessed, especially under the auspices of a fiercely nationalistic and dictatorial Chinese government. If Chinese debt holders are no longer able to meet their obligations, the Chinese government will step in to secure the debts they hold and nationalize/seize whatever valuable assets are held by foreigners, effectively offloading all their financial problems on the rest of the world. What recourse will a company like Apple have against a sovereign nation no longer willing to play by WTO rules since they have grown strong enough to ignore all but the most sincere military threats?

PakG1 8y ago

So I'm doing an MBA right now. Yeah, I know, I know. Anyway, it's a world-ranked program, located in Hong Kong. I will say that I actually have learned a lot, if that makes the below easier to believe. One of my classmates is a senior finance manager or something for a Chinese real estate company. Just finished a macro economics class where the professor identified various issues and risks around the world and particularly identified corporate debt and real estate prices (among other things) as being a really big risk in China. He also happens to get invited to advise the top of the top levels of the Chinese government on their economic planning, so he very much has a horse in this race. So my real estate finance manager classmate objected to real estate prices being a risk. She told the professor in front of the class that if things ever get bad, the Chinese government will step in and take care of everyone. This prof advises the government about their economic risks and she's telling him there's no risk. I have no idea what to think anymore. The world is crazy.

onlyrealcuzzo 8y ago
If Kyle Bass is right about China's twin deficit: If oil prices stay above $60 OR the U.S. keeps tariffs on China OR there is a global slowdown: Chinese (and especially Hong Kong) real estate is in for a really bad time. I want to point out, this isn't doom and gloom. Although China has a 90%! home ownership rate, prices could collapse 90% (they won't), and it would only affect speculators and people who bought their first home in the last 5 years (almost no one. No ordinary person can afford a first home). See the 45 minute interview here: https://www.realvision.com/tv/shows/interviews/videos/chinas-currency-cliff https://www.realvision.com/tv/shows/interviews/videos/chinas...
- adventured 8y ago
  > prices could collapse 90% (they won't), and it would only affect speculators and people who bought their first home in the last 5 years How do you arrive at that claim? ~78% of all household assets in urban China are held in residential housing ownership. A 90% housing price collapse would be beyond catastrophic to China's economy and household wealth across the board. In rural China, residential housing values represent ~65% of household wealth. China's household assets being so extremely concentrated to housing is unique among major economies. In the US, the residential real-estate market represents closer to 35% of household assets (in the UK it's around 50%). Financial assets are only 12% of urban Chinese household assets, compared to 43% in the US. China can't afford anything to go wrong in their residential housing market, much less a 90% price decline.

duxup 8y ago

Some random questions I always wonder: Do we really have reliable numbers as far as public debt in China AND what the central government has as far as money, and what they could do about it? Could China now be large enough that they could just ... cancel some debt and tell the world "That's right, we did it, you gonna just not do business in China?"

onlyrealcuzzo 8y ago
No. The US can't do that. And the US is bigger than China. No one is so big that they can remit their debts and still get low interest loans. Of course China could raise their taxes to pay for their spending, or they could keep printing money and devalue their currency. But no one can not pay debt and keep getting low interest rate loans.
- dageshi 8y ago
  I think they can when the vast majority of the debt (nearly all of it) is locally owned and denominated in their own currency. What stops them simply saying "all this debt we owe to ourselves is cancelled"?
  - DeonPenny 8y ago
    Vast inflation, being label a currency manipulator, tariffs, and basically stealing most of chinas household income and giving it to corporate would leave a sour taste in their citizen's mouth causing unrest.
  - onlyrealcuzzo 8y ago
    The same thing that stops the Federal Reserve from doing that. You can't get something from nothing. If the market has priced in that $30T is on reserve, and you just say, lol nvm -- you get incredibly fast inflation. The market reacts to that $30T not being priced in anymore.
    - dageshi 8y ago

MR4D 8y ago

China's goal is to eliminate social upheaval, mostly centered on the concept of full employment. Without it, the country risks social upheaval. Their second goal is a growing economy, so that the people can be richer, on the thinking that richer people have more to lose, and less like to cause social upheaval. The end result of this is that China will continue to contort itself to satisfy its goal. Just like the Thanksgiving Turkey, this works great...right up until it doesn't. What I hope HN people are doing in the background is contemplating what happens on that Day of Reckoning, and how it impacts them and their lives. If that day happened tomorrow, commodity prices would drop across the board. Oil would drop, as would gas, coal, grains, livestock. That would be great (unless you are employed in those industries). Then, real estate prices will drop, as the Chinese trying to get money out of the country won't be able to (it likely will be devalued, and possibly near worthless). Vancouver, and Canadian real estate in general will have price collapses. This will cause Canadian bank failures, and dry up credit in Canada. Meanwhile, companies with significant exposure in China will see their stock drop. Cash flow will be reduced, and for some, significantly. Assets may have to be marked-down to lower book values. Further, the companies that depend on the aforementioned firms will endure hardships of product logistics - manufacturing, inventory, and quality control will all go a little haywire. Firms that can move their supply chains out of China quickly will do so, helping various other countries. But countries that have significant percentages of their GDP devoted to raw materials production (such as Africa, the Arabian peninsula, Russia, and Australia) will go into recession, and some into depression. That will result in a drying up of global capital (probably quickly, as bankers run faster than most when they hear canaries chirp), and global shipping. I could go on, but you get the idea. So much of our lives (wherever we live) depend on supply chains that either run through China, or are significantly affected by China (like concrete and steel), that we are all going to be effected, and economically speaking, it won't be pretty for the world.

yeahitslikethat 8y ago
What's the time line on this getting started? What's the best strategy for investing? Asset allocation? To be specific Near term: < 6 months Short term: 6 Mos - 2 yrs Midterm: 2 years - 5 yrs Long term: 5 years or more what you're predicting here is in line with mine, but yours is way more well thought out ... and globally catastrophic. Where can money be spent right now as an investment?

zachguo 8y ago

Why China's Bonds Are Defaulting at a Record Pace https://www.bloomberg.com/news/articles/2019-02-20/why-china-s-bonds-are-defaulting-at-a-record-pace-quicktake https://www.bloomberg.com/news/articles/2019-02-20/why-china...

toomanyrichies 8y ago

If someone wanted to price this into their models, where should their short and long positions be if they assume a massive financial crisis in China within the next (say) 10 years? Asking for a friend. :-)