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My hot take on this. Yes it matters Yes there will be contagion No it won’t stop until the government (Xi and PBoC) agree on how bad it will get before they s

My hot take on this. Yes it matters Yes there will be contagion No it won’t stop until the government (Xi and PBoC) agree on how bad it will get before they start bailing others out. Now that too big to fail is dead in China, expect more failures, basically. https://t.co/TXNfUdoVi5 https://t.co/TXNfUdoVi5

VortexDream 5y ago
You realize that they've already repeatedly said they'd "bail out" people and groups affected by this? They just weren't willing to reward Evergrande's reckless behavior by giving them more money. Something the US should've done (so much for free market capitalism as a principle).
- deleted 5y ago
  [deleted]
- candiddevmike 5y ago
  I don't think it's clear yet if they plan to bail out everyone or just Chinese-based people and groups. From my understanding, evergrande had a lot of international investors.
  - Kinrany 5y ago
    Regardless of whether China does it, bailing out the debtees and letting the debtor fails is what other countries should do in the future.
    - littlestymaar 5y ago
      That doesn't bring better incentives that bailing the debtor out: it still encourage to lend money recklessly.
      - Kinrany 5y ago
        This creates at least one agent that will directly suffer the consequences of the default they caused. Of course one can create two companies, make the first borrow from the second, make the second hide the money and default, get the first bailed out and pocket the hidden stash. But they'll be easier to go after.
        littlestymaar 5y ago
        > This creates at least one agent that will directly suffer the consequences of the default they caused Iif you think of companies as “agents”. But they are not, the agent causing the default is the human in charge. And those aren't often suffering a lot from their mistakes…
        Kinrany 5y ago
        Sure, but it's easier to sue them if the company goes bankrupt.
    - randlet 5y ago
      Doesn't removing the risk from debtees still encourage reckless investing/lending? edit: apparently littlestymaar and I are operating on the same wavelength this morning.
      - dustintrex 5y ago
        China applies different disincentives: it's virtually certain a lot of Evergrande top brass will end up in jail over this.
    - thedudeabides5 5y ago
      It’s not that simple. Sometimes that’s what you want to do and you trigger a lehman. No one really knows where the trigger line for systemic with these things is. Hence the weird financial regulations like Dodd-frank in US, MiFID in EU etc
  - lettergram 5y ago
    I’m thinking they’re more likely to bail out the institutional investment (not the Chinese). They need continued investment from foreign powers.
- hericium 5y ago
  > You realize that they've already repeatedly said they'd "bail out" people and groups affected by this? I wouldn't be surprised if this would only cover domestic bond owners.
JumpCrisscross 5y ago
> there will be contagion Beijing controls its banks. If it tells them to lend, they will lend, something the U.S. doesn’t have the power to do. There is zero risk of contagion within China’s borders because that is not a failure mode in a monolithic banking system. To the degree contagion exists, it is at the sovereign level, in foreign investors decamping from China wholesale. China is less reliant on those than before. And there is no sign of that happening.
- thedudeabides5 5y ago
  Um, look at the bond prices dude. About 20%-30% of the sector is now pricing in default. Yes the local banks matter, but as we just saw, international dollar bonds can and will default these cos
  - JumpCrisscross 5y ago
    > 20%-30% of the sector is now pricing in default This is tame compared to contagion in market economies. It’s limited to a sector, and it’s limited to their dollar bonds. The banks are unscathed. There is no systemic credit crunch, nor any signs such a thing is imminent.
    - chii 5y ago
      The most important aspect is that there's probably much fewer derivative speculation from the west on chinese dollar denominated bonds (compared to the GFC). So if those bonds fails, they won't pull down other sectors or cause cross-party defaults - at least not directly. The potential for a recession in china causing recession elsewhere is non-zero though.
      - thedudeabides5 5y ago
        No, the most important is if real losses flow through the local banking system, and that causes a liquidity run on those banks. Other than that, yes the pain can in principle be contained to the dollar bond market, but even that price signal is now enough to let people start doing the (pretty ugly) math on if we're talking $100bn or $10tr of losses. If anyone sees estimates, would love to take a look!
taneq 5y ago
China's government is significantly more autocratic, though, which lets them do things like unilaterally pay out all of the creditors of a failed company using printed money. Or alternately, order strategic companies to not fail and in fact be successful. I'm not saying that's necessarily the best option but with that fine grained control over their economy, plus statistically some of the smartest humans who ever lived on the planet playing on their team, I'd be surprised if China's current power structure doesn't ride this out.
- chii 5y ago
  > unilaterally pay out all of the creditors of a failed company using printed money. that's a bailout, and that is what the CCP wants to avoid being seen as doing.
  - infamia 5y ago
    It would also make future moral hazards increasingly likely (i.e. encouraging others to take wild risks in the future since they might get bailed out).

VortexDream 5y ago

You realize that they've already repeatedly said they'd "bail out" people and groups affected by this? They just weren't willing to reward Evergrande's reckless behavior by giving them more money. Something the US should've done (so much for free market capitalism as a principle).

deleted 5y ago
[deleted]
candiddevmike 5y ago
I don't think it's clear yet if they plan to bail out everyone or just Chinese-based people and groups. From my understanding, evergrande had a lot of international investors.
- Kinrany 5y ago
  Regardless of whether China does it, bailing out the debtees and letting the debtor fails is what other countries should do in the future.
  - littlestymaar 5y ago
    That doesn't bring better incentives that bailing the debtor out: it still encourage to lend money recklessly.
    - Kinrany 5y ago
      This creates at least one agent that will directly suffer the consequences of the default they caused. Of course one can create two companies, make the first borrow from the second, make the second hide the money and default, get the first bailed out and pocket the hidden stash. But they'll be easier to go after.
      - littlestymaar 5y ago
        > This creates at least one agent that will directly suffer the consequences of the default they caused Iif you think of companies as “agents”. But they are not, the agent causing the default is the human in charge. And those aren't often suffering a lot from their mistakes…
        Kinrany 5y ago
        Sure, but it's easier to sue them if the company goes bankrupt.
  - randlet 5y ago
    Doesn't removing the risk from debtees still encourage reckless investing/lending? edit: apparently littlestymaar and I are operating on the same wavelength this morning.
    - dustintrex 5y ago
      China applies different disincentives: it's virtually certain a lot of Evergrande top brass will end up in jail over this.
  - thedudeabides5 5y ago
    It’s not that simple. Sometimes that’s what you want to do and you trigger a lehman. No one really knows where the trigger line for systemic with these things is. Hence the weird financial regulations like Dodd-frank in US, MiFID in EU etc
- lettergram 5y ago
  I’m thinking they’re more likely to bail out the institutional investment (not the Chinese). They need continued investment from foreign powers.
hericium 5y ago
> You realize that they've already repeatedly said they'd "bail out" people and groups affected by this? I wouldn't be surprised if this would only cover domestic bond owners.

JumpCrisscross 5y ago

> there will be contagion Beijing controls its banks. If it tells them to lend, they will lend, something the U.S. doesn’t have the power to do. There is zero risk of contagion within China’s borders because that is not a failure mode in a monolithic banking system. To the degree contagion exists, it is at the sovereign level, in foreign investors decamping from China wholesale. China is less reliant on those than before. And there is no sign of that happening.

thedudeabides5 5y ago
Um, look at the bond prices dude. About 20%-30% of the sector is now pricing in default. Yes the local banks matter, but as we just saw, international dollar bonds can and will default these cos
- JumpCrisscross 5y ago
  > 20%-30% of the sector is now pricing in default This is tame compared to contagion in market economies. It’s limited to a sector, and it’s limited to their dollar bonds. The banks are unscathed. There is no systemic credit crunch, nor any signs such a thing is imminent.
  - chii 5y ago
    The most important aspect is that there's probably much fewer derivative speculation from the west on chinese dollar denominated bonds (compared to the GFC). So if those bonds fails, they won't pull down other sectors or cause cross-party defaults - at least not directly. The potential for a recession in china causing recession elsewhere is non-zero though.
    - thedudeabides5 5y ago
      No, the most important is if real losses flow through the local banking system, and that causes a liquidity run on those banks. Other than that, yes the pain can in principle be contained to the dollar bond market, but even that price signal is now enough to let people start doing the (pretty ugly) math on if we're talking $100bn or $10tr of losses. If anyone sees estimates, would love to take a look!

taneq 5y ago

China's government is significantly more autocratic, though, which lets them do things like unilaterally pay out all of the creditors of a failed company using printed money. Or alternately, order strategic companies to not fail and in fact be successful. I'm not saying that's necessarily the best option but with that fine grained control over their economy, plus statistically some of the smartest humans who ever lived on the planet playing on their team, I'd be surprised if China's current power structure doesn't ride this out.

chii 5y ago
> unilaterally pay out all of the creditors of a failed company using printed money. that's a bailout, and that is what the CCP wants to avoid being seen as doing.
- infamia 5y ago
  It would also make future moral hazards increasingly likely (i.e. encouraging others to take wild risks in the future since they might get bailed out).