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Maybe someone with more knowledge can explain this to me. When they defaulted, that means that they failed to pay back one of their debts, it does not mean that

Maybe someone with more knowledge can explain this to me. When they defaulted, that means that they failed to pay back one of their debts, it does not mean that they are completely out of money, right? What stops them from selectively defaulting? Stop paying back some of the politically less important debts, and continue chugging on, servicing only certain debtors. I'd assume with unlimited political backing this should not be a problem. OTOH I read somewhere that the political leadership is not amused and wants to make an example. Also, I would say China has benefited a lot from the international financial system and from the rules of international commerce, so they probably have to honor international debts.

sbarre 5y ago
From reading the article, it seems they need to raise more money to actually resume many of their construction projects (which is where their revenue comes from), and because they are unable to repay existing debt, no one else wants to give them money.
- vesinisa 5y ago
  Which is hardly surprising, given how insane the Chinese real estate bubble is. I understand there are entire ghost cities of extensive high-rise developments - sitting largely abandoned and owned as vacant second homes by Chinese private investors waiting to sell them on a profit thanks to an urban migration that might never happen. Edit: I don't know why am I being downvoted. The Chinese real estate bubble has been rather well-documented, see e.g. this YouTube video: https://youtu.be/EgVXRtq5EIg https://youtu.be/EgVXRtq5EIg
  - pjc50 5y ago
    Yes, this is basically Anglo-Irish Bank on a much larger scale.
api 5y ago
That seems right. When people get into money trouble they will start skipping some debt payments first. The mortgage or rent is usually last to skip for obvious reasons.
- samhw 5y ago
  It doesn't always mean what it looks like it means, FWIW. The dad of one of my close friends defaulted on a £600m loan, essentially 'strategically' in order to play hardball, and it got reported by lots of newspapers as if he'd gone bankrupt. I think a lot of people extrapolate from personal finances to business (or in that case HNW) finances, and it doesn't really work that way.
odshoifsdhfs 5y ago
These bonds have a cross-default clause (not sure if correct term) which means if you default on one, you technically default on all of them (I guess exactly to prevent what you mean and screwing the lower ranked investors)
- bombcar 5y ago
  Exactly. What it means is now all creditors can “call” their loans and demand payment in full - which causes a “run on the bank” type stampede usually. Unless it were made clear that only foreign creditors are going to get screwed, they will all call.
PeterisP 5y ago
The bond contracts explicitly cover this scenario, they contain language that ties all the bonds together. This is why the "did they technically default?" is important - the default on one bond triggers the protections for all the other bonds, even if their due date was far into the future, requiring Evergrande to split any repayments equally across the whole class of the bonds right now. They can choose how to prioritize their contracts until they default, but once they do, the choice is limited and their assets would (or at least should - legal enforcement may be tricky and take time) get split among the relevant debtors as contracted.
- colinmhayes 5y ago
  This depends on how tightly contracts are enforced. For all we know the government is the one telling Evergrande not to pay USD denominated bonds. What recourse do the bond holders have if the courts tell them to fuck off?
  - PeterisP 5y ago
    First, we don't necessarily expect the courts to tell them to fuck off. The Evergrande organization issuing these bonds (e.g. the bond offering at e.g. https://secure.fundsupermart.com/fsm/bond/relatedBondDocument/784/EVERGRANDE%20-%20Prelim%20OM.pdf https://secure.fundsupermart.com/fsm/bond/relatedBondDocumen... ) is apparently registered in Cayman Islands which we would expect to apply bond law properly, and enforcement in China would be through Hong Kong courts (where their Chinese operations are held) which are technically independent and while may be influenced by CCP they do have a somewhat reasonable reputation. If the local courts do blatantly refuse enforcing proper process of insolvency and fair distributing of assets to debtors, two ways of possible (not necessarily certain) recourse come to mind. One is using non-Chinese courts for claims directly against other bondholders - if Evergrande pays everything to bondholder A and nothing to bondholder B, then B may have a claim on part of the money unfairly paid to A, and they may try to get their assets abroad (if any - A might have only Chinese operations) as compensation. The other is applying various international treaties on protection of investors (it has been relevant in some earlier cases, but I have no idea on the specific treaty status with respect to China). That's highly political (but anything of this size is inherently political), but a hypothetical option would be to get a judgement that Chinese government is liable for part of the damages (not the whole defaulted part - that risk is on investors - but the post-default payments to some bondholders instead of others) and e.g. apply tariffs to Chinese exports to seize compensation for that. But the practical results of such an escalation IMHO depend more on political factors than legal aspects.
max_ 5y ago
A financer youtuber perfectly broke it down for me yesterday. [0] [0]: https://www.youtube.com/watch?v=jyvMx96zcdc https://www.youtube.com/watch?v=jyvMx96zcdc
redis_mlc 5y ago
You're attempting to apply Western financial concepts to China. The CCP literally doesn't care about anybody but themselves, doubly so for foreigners. What they will do, and have been doing, is ensure locals are treated well, and foreign investors will get nothing. The reason locals will get something is because 80% of household wealth is in real estate, propping up almost half of their GDP growth for the past 3 decades. > I would say China has benefited a lot from the international financial system and from the rules of international commerce, so they probably have to honor international debts. It's the exact opposite. They benefit from US capital markets, and exploit that to the max. Shortly after WW2, the CCP defaulted on US bonds and those are still being litigated. The CCP considers contracts and treaties "binding the wrists of foreigners", never themselves. The whole point of contracts and treaties is that they're just paper to the CCP. Now do you understand how it works? What is good about the Evergrande default(s) is that Trump/Pompeo were in the process of restricting US capital markets using the government, but now Wall Street will voluntarily examine risk more carefully.
jbverschoor 5y ago
They haven't defaulted yet, but according to Fitch Ratings they defaulted.
hugh-avherald 5y ago
Might be hard to find someone to borrow from if you've got a propensity for defaulting.
pjc50 5y ago
> What stops them from selectively defaulting? Most bond agreements have thought of that: nobody wants to be the one creditor defaulted on. So there's an agreement that any default is treated as a default on all. (see also the long running Argentina "pari passu" fiasco: https://www.creditslips.org/creditslips/2020/01/a-cautionary-tale-argentinas-pari-passu-debt-debacle.html https://www.creditslips.org/creditslips/2020/01/a-cautionary... )

sbarre 5y ago

From reading the article, it seems they need to raise more money to actually resume many of their construction projects (which is where their revenue comes from), and because they are unable to repay existing debt, no one else wants to give them money.

vesinisa 5y ago
Which is hardly surprising, given how insane the Chinese real estate bubble is. I understand there are entire ghost cities of extensive high-rise developments - sitting largely abandoned and owned as vacant second homes by Chinese private investors waiting to sell them on a profit thanks to an urban migration that might never happen. Edit: I don't know why am I being downvoted. The Chinese real estate bubble has been rather well-documented, see e.g. this YouTube video: https://youtu.be/EgVXRtq5EIg https://youtu.be/EgVXRtq5EIg
- pjc50 5y ago
  Yes, this is basically Anglo-Irish Bank on a much larger scale.

api 5y ago

That seems right. When people get into money trouble they will start skipping some debt payments first. The mortgage or rent is usually last to skip for obvious reasons.

samhw 5y ago
It doesn't always mean what it looks like it means, FWIW. The dad of one of my close friends defaulted on a £600m loan, essentially 'strategically' in order to play hardball, and it got reported by lots of newspapers as if he'd gone bankrupt. I think a lot of people extrapolate from personal finances to business (or in that case HNW) finances, and it doesn't really work that way.

odshoifsdhfs 5y ago

These bonds have a cross-default clause (not sure if correct term) which means if you default on one, you technically default on all of them (I guess exactly to prevent what you mean and screwing the lower ranked investors)

bombcar 5y ago
Exactly. What it means is now all creditors can “call” their loans and demand payment in full - which causes a “run on the bank” type stampede usually. Unless it were made clear that only foreign creditors are going to get screwed, they will all call.

PeterisP 5y ago

The bond contracts explicitly cover this scenario, they contain language that ties all the bonds together. This is why the "did they technically default?" is important - the default on one bond triggers the protections for all the other bonds, even if their due date was far into the future, requiring Evergrande to split any repayments equally across the whole class of the bonds right now. They can choose how to prioritize their contracts until they default, but once they do, the choice is limited and their assets would (or at least should - legal enforcement may be tricky and take time) get split among the relevant debtors as contracted.

colinmhayes 5y ago
This depends on how tightly contracts are enforced. For all we know the government is the one telling Evergrande not to pay USD denominated bonds. What recourse do the bond holders have if the courts tell them to fuck off?
- PeterisP 5y ago
  First, we don't necessarily expect the courts to tell them to fuck off. The Evergrande organization issuing these bonds (e.g. the bond offering at e.g. https://secure.fundsupermart.com/fsm/bond/relatedBondDocument/784/EVERGRANDE%20-%20Prelim%20OM.pdf https://secure.fundsupermart.com/fsm/bond/relatedBondDocumen... ) is apparently registered in Cayman Islands which we would expect to apply bond law properly, and enforcement in China would be through Hong Kong courts (where their Chinese operations are held) which are technically independent and while may be influenced by CCP they do have a somewhat reasonable reputation. If the local courts do blatantly refuse enforcing proper process of insolvency and fair distributing of assets to debtors, two ways of possible (not necessarily certain) recourse come to mind. One is using non-Chinese courts for claims directly against other bondholders - if Evergrande pays everything to bondholder A and nothing to bondholder B, then B may have a claim on part of the money unfairly paid to A, and they may try to get their assets abroad (if any - A might have only Chinese operations) as compensation. The other is applying various international treaties on protection of investors (it has been relevant in some earlier cases, but I have no idea on the specific treaty status with respect to China). That's highly political (but anything of this size is inherently political), but a hypothetical option would be to get a judgement that Chinese government is liable for part of the damages (not the whole defaulted part - that risk is on investors - but the post-default payments to some bondholders instead of others) and e.g. apply tariffs to Chinese exports to seize compensation for that. But the practical results of such an escalation IMHO depend more on political factors than legal aspects.

max_ 5y ago

A financer youtuber perfectly broke it down for me yesterday. [0] [0]: https://www.youtube.com/watch?v=jyvMx96zcdc https://www.youtube.com/watch?v=jyvMx96zcdc

redis_mlc 5y ago

You're attempting to apply Western financial concepts to China. The CCP literally doesn't care about anybody but themselves, doubly so for foreigners. What they will do, and have been doing, is ensure locals are treated well, and foreign investors will get nothing. The reason locals will get something is because 80% of household wealth is in real estate, propping up almost half of their GDP growth for the past 3 decades. > I would say China has benefited a lot from the international financial system and from the rules of international commerce, so they probably have to honor international debts. It's the exact opposite. They benefit from US capital markets, and exploit that to the max. Shortly after WW2, the CCP defaulted on US bonds and those are still being litigated. The CCP considers contracts and treaties "binding the wrists of foreigners", never themselves. The whole point of contracts and treaties is that they're just paper to the CCP. Now do you understand how it works? What is good about the Evergrande default(s) is that Trump/Pompeo were in the process of restricting US capital markets using the government, but now Wall Street will voluntarily examine risk more carefully.

jbverschoor 5y ago

They haven't defaulted yet, but according to Fitch Ratings they defaulted.

hugh-avherald 5y ago

Might be hard to find someone to borrow from if you've got a propensity for defaulting.

pjc50 5y ago

> What stops them from selectively defaulting? Most bond agreements have thought of that: nobody wants to be the one creditor defaulted on. So there's an agreement that any default is treated as a default on all. (see also the long running Argentina "pari passu" fiasco: https://www.creditslips.org/creditslips/2020/01/a-cautionary-tale-argentinas-pari-passu-debt-debacle.html https://www.creditslips.org/creditslips/2020/01/a-cautionary... )