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Will the People's Bank of China be paying Evergrande's foreign debts (aka bonds)? How many derivative products were created off those in other markets? Will it

Will the People's Bank of China be paying Evergrande's foreign debts (aka bonds)? How many derivative products were created off those in other markets? Will it be as bad as 2008/09 when Mortgage Backed Securities and their derivatives collapsed except this time it is Commercial Mortgage Backed Securities? Just asking questions in case anyone closer to those business areas wants to chime in. I doubt there is transparency coming out of China about this.

EarthIsHome 5y ago
I think it's pretty clear that China isn't going to bail them out like how the US bailed out our failed companies back in 2008. China cares more about protecting the homebuyers and contractors who are building the homes more than protecting the investors [0][1]: > Evergrande has almost 800 projects across China, many of them funded by advance payments from homebuyers. > Local governments have ringfenced homebuyer deposits and other funds to ensure that Evergrande projects in their jurisdiction are completed and contractors paid on time. So this is a much different reaction than the US government who protected the investors and banks. [0]: https://www.ft.com/content/6d6b1f79-52b3-49e5-aa8a-7068adec7a9d https://www.ft.com/content/6d6b1f79-52b3-49e5-aa8a-7068adec7... [1]: archive.is link of [0] https://archive.ph/GKWmv https://archive.ph/GKWmv
- starfallg 5y ago
  >So this is a much different reaction than the US government who protected the investors and banks. It was mainly to prevent systemic collapse of the financial system. Banks and other financial institutions profiting from it is an 'unfortunate' side-effect.
  - kmlevitt 5y ago
    Why couldn’t they have prevented the systemic collapse simply by bailing out the individual homeowners? If they had gotten bailed out, so would have their banks.
    - floor2 5y ago
      Ethically, that would have been even worse. People rage against the banks, but it's important to remember the actual fraud was happening at the homebuyer level. Millions of people were buying houses by lying on their mortgage applications about their incomes and assets, getting interest-only mortgages they could barely pay, and hoping to sell the house for a profit before their fraud was discovered. When the market moved against the fraudsters and they got caught with houses they couldn't pay for that were worth less than they owed, which is why they started defaulting on their payments. The victims weren't the people who quit paying their fraudulent mortgages, the victims were the people who were deceived into loaning them money.
      - Jtype 5y ago
        According to statista.com 5.2 million homes were sold in the US in 2007. Do you seriously believe that 30%+ of these sales were intended as investment only? Even if that were true it would have been more ethical to bail out the home buyers than the banks themselves. The majority of people who lost their homes ended up over their heads through no fault of their own.
        mlac 5y ago
        You would have had moral hazard with home buying, and people would have been incentivized to pay a lot more for their homes because the likelihood of a bailout would be good. At least with a central approach, regulators could come in and monitor. There wouldn’t really be a way for regulators to check home prices / the free market at such a massive scale.
        floor2 5y ago
        People lied on their mortgage applications, claiming to have incomes and assets they didn't have, so that they could take out massive loans they could never repay. The loans were structured to have low payments initially and then larger payments later, which the fraudulent actors were ok with because they expected to flip the house before the larger payments were due. That is what caused the mortgage crisis. To pretend that people committing fraud lost out "through no fault of their own" makes no sense, it's entirely their own fault. Legitimate buyers wouldn't be impacted- if a person buys a house to live in it, and pays for instance $3,000 per month, then the market price after purchase doesn't matter. They still live in their house and they still pay $3,000 per month. Maybe you weren't around at that time, but there were a dozen different wildly popular TV shows about people flipping houses, people were buying houses with zero down payments, buying houses they couldn't afford because "real estate always goes up" and advice to "buy now and refinance in 6 months when the price has gone up" and all sorts of other greedy, speculative behavior. Houses in 2007 were the cryptocoins of the day, but with massive leverage by lying on mortgage applications.
  - JohnJamesRambo 5y ago
    But the banks were the ones telling us that. How true was it?
    - abakker 5y ago
      An interesting read to answer this question would be "Stress Test" by Timothy Geithner. I think the general consensus was that in the moment, all appearances of financial contagion were very real.
    - neffy 5y ago
      It was true. The banking system can absorb in a best case losses on its outstanding loans of about 0.75% - that is 0.75% of the total amount of loans. Absent intervention, the consequences of 2008 would have been Great Depression 2. With intervention, we get to deal with a different set of problems (most of which could to be fair about it, be resolved by clamping down on tax avoidance in the financial sector.)
      - steve76 5y ago
        [dead]
  - ur-whale 5y ago
    >It was mainly to prevent systemic collapse What systemic collapse ? When a tree is rotten to its core, you need to either let it collapse on it own, or if it risks damaging other things when crashing, you cut it down. One thing you do not do is prop it up and pretend that all is well.
    - refurb 5y ago
      With regards to 2008, absolutely not. Caterpillar, which has nothing to do with the housing market had no market for its commercial paper which financed day to day operations. I agree 100% that the banks and housing industry should have been allowed to collapse but it had gone so far beyond that there was no choice but to bail out banks or suffer from decade long depression like the 1930’s.
      - mindslight 5y ago
        > Caterpillar ... had no market for its commercial paper which financed day to day operations ... at the lowball prices they felt entitled to. Did they try offering bonds with real interest rates, say 7-10% ? I'm reminded of this recent narrative about the so-called "labor shortage".
        refurb 5y ago
        Market was frozen. When the major banks were going under would you lend someone hundreds of millions? Even at 10% interest?
        mindslight 5y ago
        Unfortunately I don't have hundreds of millions of dollars, so the question is moot. But yes, loaning out cash to blue chips and receiving bonds with yields approaching that of stocks would be a prudent move at such a time. Also "market was frozen" is such a short period of time compared to the length of the Fed's stimulus.
  - CPLX 5y ago
    When you have a ton of people in default on mortgage loans, and you pay off the loans for them or otherwise help with their default then people don’t lose their homes AND the banks are OK and the system doesn’t collapse. If you take the same amount of money and just give it to the banks and they foreclose on the homeowners the banks are also OK. But the homeowners are fucked. Guess which of those two options we chose following the 2008 financial crisis.
    - ImprobableTruth 5y ago
      The money wasn't just 'given' to banks, it was a loan that they ended up paying back. Just paying off loans for homeowners with bad mortgages would also have been horrible - you're essentially rewarding bad quality loans. And how else would you bailout homeowners?
      - CPLX 5y ago
        You could restructure the loans make the interest rate lower make the payment period longer prohibit the banks charging extortionate penalties and fees make the banks write down some of the principal or accumulated interest in arrears and lots of other stuff. It’s ridiculous to claim that there were no options here. And also it’s telling that you don’t even consider the idea that the homeowners could have gotten similar treatment, ie a favorable loan that enabled them to eventually pay the principal back. Also you’d have to explain how bailing out banks that made poor quality loans and are on the risk of insolvency isn’t “rewarding bad quality loans”.
        ImprobableTruth 5y ago
        A lot of loans were restructured (both due to the government and because banks themselves don't want people defaulting on loans either), but for a lot of the really bad loans the slight help from restructuring wouldn't have been enough. That's also why giving homeowners a loan wouldn't have helped, which is essentially just restructuring. >Also you’d have to explain how bailing out banks that made poor quality loans and are on the risk of insolvency isn’t “rewarding bad quality loans”. It is, to an extent, but a loan is much less of a reward than someone paying off your debt. That's also why new regulations were introduced so that future behavior likes this from banks wasn't incentivized.
- JumpCrisscross 5y ago
  The U.S. bailed out its banks. There is zero sign China is letting these defaults threaten its domestic banks, which are state owned.
- InTheArena 5y ago
  The idea that the PRC will act to protect foreign economies or foreign investors is directly contradicted by every single thing the Chinese government have done the last two decades. If they basically allow Chinese citizens to outright steal corporations (See ARM China), why do you think they would step in here?
- duxup 5y ago
  China will protect local banks just like the US does / did.
PeterisP 5y ago
> Will the People's Bank of China be paying Evergrande's foreign debts (aka bonds)? No, why would they do that? They're saying that they'll pump money into the economy to prevent a price slump from causing other defaults, there's no expectation whatsoever that there will be any compensation to bondholders; losing money if the company defaults is part of the bond investment business. China might offer some assistance (e.g. subsidized loans) to some affected local companies for domestic policy reasons, but they're very unlikely to gift money to foreign investors in this case.
dageshi 5y ago
The vast majority of evergrandes debt is denominated in CNY not USD I think. Bear in mind how tightly china controls access to its markets and its currency isn't easily convertible. In other words, there's probably far less spillover into the rest of the world because the rest of the world simply couldn't lend evergrande that much money in the first place.
rswail 5y ago
Why would they? That would be like the US government bailing out the EU banks that invested in the 2008 real estate credit swap nonsense... oh, well, they bailed out the local banks at least.
OneTimePetes 5y ago
China will value internal stability and safety higher then external investors.Internal lenders will get securities and partial payments, while BlackRock and other will be left holding the bag and getting a hair cut. This results in private pensions funds being devalued, meaning alot of "early out" pensioners might return to working, if the investment collapse spreads. It will also continue to drive the market value of flats in western cities even more upwards, as they become a AAA-haven for china fleeing capital.
- lotsofpulp 5y ago
  Yes, this is all good news for US equity markets.
- deleted 5y ago
  [deleted]

EarthIsHome 5y ago

I think it's pretty clear that China isn't going to bail them out like how the US bailed out our failed companies back in 2008. China cares more about protecting the homebuyers and contractors who are building the homes more than protecting the investors [0][1]: > Evergrande has almost 800 projects across China, many of them funded by advance payments from homebuyers. > Local governments have ringfenced homebuyer deposits and other funds to ensure that Evergrande projects in their jurisdiction are completed and contractors paid on time. So this is a much different reaction than the US government who protected the investors and banks. [0]: https://www.ft.com/content/6d6b1f79-52b3-49e5-aa8a-7068adec7a9d https://www.ft.com/content/6d6b1f79-52b3-49e5-aa8a-7068adec7... [1]: archive.is link of [0] https://archive.ph/GKWmv https://archive.ph/GKWmv

starfallg 5y ago
>So this is a much different reaction than the US government who protected the investors and banks. It was mainly to prevent systemic collapse of the financial system. Banks and other financial institutions profiting from it is an 'unfortunate' side-effect.
- kmlevitt 5y ago
  Why couldn’t they have prevented the systemic collapse simply by bailing out the individual homeowners? If they had gotten bailed out, so would have their banks.
  - floor2 5y ago
    Ethically, that would have been even worse. People rage against the banks, but it's important to remember the actual fraud was happening at the homebuyer level. Millions of people were buying houses by lying on their mortgage applications about their incomes and assets, getting interest-only mortgages they could barely pay, and hoping to sell the house for a profit before their fraud was discovered. When the market moved against the fraudsters and they got caught with houses they couldn't pay for that were worth less than they owed, which is why they started defaulting on their payments. The victims weren't the people who quit paying their fraudulent mortgages, the victims were the people who were deceived into loaning them money.
    - Jtype 5y ago
      According to statista.com 5.2 million homes were sold in the US in 2007. Do you seriously believe that 30%+ of these sales were intended as investment only? Even if that were true it would have been more ethical to bail out the home buyers than the banks themselves. The majority of people who lost their homes ended up over their heads through no fault of their own.
      - mlac 5y ago
        You would have had moral hazard with home buying, and people would have been incentivized to pay a lot more for their homes because the likelihood of a bailout would be good. At least with a central approach, regulators could come in and monitor. There wouldn’t really be a way for regulators to check home prices / the free market at such a massive scale.
      - floor2 5y ago
        People lied on their mortgage applications, claiming to have incomes and assets they didn't have, so that they could take out massive loans they could never repay. The loans were structured to have low payments initially and then larger payments later, which the fraudulent actors were ok with because they expected to flip the house before the larger payments were due. That is what caused the mortgage crisis. To pretend that people committing fraud lost out "through no fault of their own" makes no sense, it's entirely their own fault. Legitimate buyers wouldn't be impacted- if a person buys a house to live in it, and pays for instance $3,000 per month, then the market price after purchase doesn't matter. They still live in their house and they still pay $3,000 per month. Maybe you weren't around at that time, but there were a dozen different wildly popular TV shows about people flipping houses, people were buying houses with zero down payments, buying houses they couldn't afford because "real estate always goes up" and advice to "buy now and refinance in 6 months when the price has gone up" and all sorts of other greedy, speculative behavior. Houses in 2007 were the cryptocoins of the day, but with massive leverage by lying on mortgage applications.
- JohnJamesRambo 5y ago
  But the banks were the ones telling us that. How true was it?
  - abakker 5y ago
    An interesting read to answer this question would be "Stress Test" by Timothy Geithner. I think the general consensus was that in the moment, all appearances of financial contagion were very real.
  - neffy 5y ago
    It was true. The banking system can absorb in a best case losses on its outstanding loans of about 0.75% - that is 0.75% of the total amount of loans. Absent intervention, the consequences of 2008 would have been Great Depression 2. With intervention, we get to deal with a different set of problems (most of which could to be fair about it, be resolved by clamping down on tax avoidance in the financial sector.)
    - steve76 5y ago
      [dead]
- ur-whale 5y ago
  >It was mainly to prevent systemic collapse What systemic collapse ? When a tree is rotten to its core, you need to either let it collapse on it own, or if it risks damaging other things when crashing, you cut it down. One thing you do not do is prop it up and pretend that all is well.
  - refurb 5y ago
    With regards to 2008, absolutely not. Caterpillar, which has nothing to do with the housing market had no market for its commercial paper which financed day to day operations. I agree 100% that the banks and housing industry should have been allowed to collapse but it had gone so far beyond that there was no choice but to bail out banks or suffer from decade long depression like the 1930’s.
    - mindslight 5y ago
      > Caterpillar ... had no market for its commercial paper which financed day to day operations ... at the lowball prices they felt entitled to. Did they try offering bonds with real interest rates, say 7-10% ? I'm reminded of this recent narrative about the so-called "labor shortage".
      - refurb 5y ago
        Market was frozen. When the major banks were going under would you lend someone hundreds of millions? Even at 10% interest?
        mindslight 5y ago
        Unfortunately I don't have hundreds of millions of dollars, so the question is moot. But yes, loaning out cash to blue chips and receiving bonds with yields approaching that of stocks would be a prudent move at such a time. Also "market was frozen" is such a short period of time compared to the length of the Fed's stimulus.
- CPLX 5y ago
  When you have a ton of people in default on mortgage loans, and you pay off the loans for them or otherwise help with their default then people don’t lose their homes AND the banks are OK and the system doesn’t collapse. If you take the same amount of money and just give it to the banks and they foreclose on the homeowners the banks are also OK. But the homeowners are fucked. Guess which of those two options we chose following the 2008 financial crisis.
  - ImprobableTruth 5y ago
    The money wasn't just 'given' to banks, it was a loan that they ended up paying back. Just paying off loans for homeowners with bad mortgages would also have been horrible - you're essentially rewarding bad quality loans. And how else would you bailout homeowners?
    - CPLX 5y ago
      You could restructure the loans make the interest rate lower make the payment period longer prohibit the banks charging extortionate penalties and fees make the banks write down some of the principal or accumulated interest in arrears and lots of other stuff. It’s ridiculous to claim that there were no options here. And also it’s telling that you don’t even consider the idea that the homeowners could have gotten similar treatment, ie a favorable loan that enabled them to eventually pay the principal back. Also you’d have to explain how bailing out banks that made poor quality loans and are on the risk of insolvency isn’t “rewarding bad quality loans”.
      - ImprobableTruth 5y ago
        A lot of loans were restructured (both due to the government and because banks themselves don't want people defaulting on loans either), but for a lot of the really bad loans the slight help from restructuring wouldn't have been enough. That's also why giving homeowners a loan wouldn't have helped, which is essentially just restructuring. >Also you’d have to explain how bailing out banks that made poor quality loans and are on the risk of insolvency isn’t “rewarding bad quality loans”. It is, to an extent, but a loan is much less of a reward than someone paying off your debt. That's also why new regulations were introduced so that future behavior likes this from banks wasn't incentivized.
JumpCrisscross 5y ago
The U.S. bailed out its banks. There is zero sign China is letting these defaults threaten its domestic banks, which are state owned.
InTheArena 5y ago
The idea that the PRC will act to protect foreign economies or foreign investors is directly contradicted by every single thing the Chinese government have done the last two decades. If they basically allow Chinese citizens to outright steal corporations (See ARM China), why do you think they would step in here?
duxup 5y ago
China will protect local banks just like the US does / did.

PeterisP 5y ago

> Will the People's Bank of China be paying Evergrande's foreign debts (aka bonds)? No, why would they do that? They're saying that they'll pump money into the economy to prevent a price slump from causing other defaults, there's no expectation whatsoever that there will be any compensation to bondholders; losing money if the company defaults is part of the bond investment business. China might offer some assistance (e.g. subsidized loans) to some affected local companies for domestic policy reasons, but they're very unlikely to gift money to foreign investors in this case.

dageshi 5y ago

The vast majority of evergrandes debt is denominated in CNY not USD I think. Bear in mind how tightly china controls access to its markets and its currency isn't easily convertible. In other words, there's probably far less spillover into the rest of the world because the rest of the world simply couldn't lend evergrande that much money in the first place.

rswail 5y ago

Why would they? That would be like the US government bailing out the EU banks that invested in the 2008 real estate credit swap nonsense... oh, well, they bailed out the local banks at least.

OneTimePetes 5y ago

China will value internal stability and safety higher then external investors.Internal lenders will get securities and partial payments, while BlackRock and other will be left holding the bag and getting a hair cut. This results in private pensions funds being devalued, meaning alot of "early out" pensioners might return to working, if the investment collapse spreads. It will also continue to drive the market value of flats in western cities even more upwards, as they become a AAA-haven for china fleeing capital.

lotsofpulp 5y ago
Yes, this is all good news for US equity markets.
deleted 5y ago
[deleted]