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How are over-leveraged developers that different from what caused the 2008 global financial crisis? The cause of the GFC was that assets were labeled as safe bu

How are over-leveraged developers that different from what caused the 2008 global financial crisis? The cause of the GFC was that assets were labeled as safe but were in fact unsafe. So one day everyone woke up and had less money than they thought they had. The same thing can happen from over-leveraged developers. Banks lend money to people to buy real-estate. Everyone expects those units to exist, and if they suddenly don't exist en-masse, then that's going to be a major shock.

jpgvm 4y ago
It matters because of contagion. As it stands there are individuals at risk of being over-leveraged by having a loan on a asset that doesn't currently exist (but probably will, CCP has a way of compelling such things to happen) or has dropped in value compared to when they bought it (most likely). Developers and construction companies are also in hot water as their business models relied on continually pre-selling apartments to provide liquidity for their operations. This is where the similarities end vs 2008. The main issue with 2008 wasn't the housing bubble itself, such bubbles are normal and happen all the time. The issue was the extent of the financial over-leveraging (due to deregulation) by the financial firms which threatened the solvency of Main st and Wall st banks alike and the incentives that came out of the synthetic financial products that were engineered over baskets of mortgages. Namely a reduction in qualification for sub-prime loans and increased incentives to offer variable rate mortgages with cliff clauses + continual refinancing + speculation + flipping etc. Essentially normal people losing their house == expected (though sad still) and would have caused a moderate recession (again, expected). However because of how overleveraged the banks themselves were they collapsed, this spread (contagion) to pension funds, equities, everywhere essentially and because these assets and positions in the funds and banks were held across the world it resulted in the -global- financial crisis rather than a contained RE bubble popping.
- jollybean 4y ago
  Yeah, dude, the number of 'normal people losing their homes' will create a revolution, and/or, consumer spending will crash, combined with the fact that a 'major component of GDP has crashed' (i.e. construction), that's 'extremely bad'. The US was able to 'rebalance' by propping up some banks - but in reality they saved 'consumers' by taking toxic loan assets of banks balance sheet and absorbing it onto the fed balance sheet. CCP can't really do that for houses that are not built. The other issue is the size of that part of the economy in relative terms. This is is not going to 'blow over' - everything, including Xi's totalitarian takeover, increased control and repression, issue of age, diminishing marginal returns to growth ... ... this adds up to a 'major shift' in what China is. We saw a different China in the 1990s (quietly building), 2000's (onto the world stage), 2010 trying to be a global superpower, threatening Taiwan, occupying S. China Sea etc, and now 2020's 'reckoning /rebalancing'.
  - jpgvm 4y ago
    As I said, I will believe it when I see it. Heard the same doomsday stories over and over at this point. The most likely way this plays out is CCP slowly nationalizes Evergrande and other embattled developers (bond holders and equity investors 100% screwed), sell the unfinished projects to developers that didn't run themselves into the ground for them to be completed. This is already happening. As much as people want to believe there will be collapse I just see it as incredibly unlikely given both track record and the iron grip that CCP has over the Chinese state banks. Without a failure in the banking sector I just don't see significant enough contagion to cause long-term damage.
  - JumpCrisscross 4y ago
    > taking toxic loan assets of banks balance sheet and absorbing it onto the fed balance sheet This is not what happened. (The Fed never bought the toxic assets. It bought Treasuries and super-safe nontraditional assets off owners of toxic assets so they had the liquidity to resolve themselves. But the toxic stuff ended up in other places.)
    - jollybean 4y ago
      No, the Central Banks give banks cash in return for garbage mortgages. Look at the giant bump in 2008 in Fed assets. Most of that is mortgages. And then in 2019 an even bigger calamity. Those massive jumps represent the finantialization of the USA, a massive form of economic shift. [1] https://wallstreetonparade.com/2022/06/fed-data-shows-a-half-century-of-moderate-growth-in-the-feds-balance-sheet-through-two-world-wars-then-a-seismic-explosion-under-bernanke-yellen-and-powell/ https://wallstreetonparade.com/2022/06/fed-data-shows-a-half...
      - JumpCrisscross 4y ago
        > Central Banks give banks cash in return for garbage mortgages There are zero mortgages on the Fed’s balance sheet. There has never been a mortgage on its balance sheet. If you think the Fed bought whole mortgages off banks for keepsies, or lost a single cent on its bailouts, you’ve missed something.
- atwood22 4y ago
  This doesn't answer the question. China also sells mortgage backed securities and has parts of its financial sector operating with little regulation. Something like 40% of outstanding Chinese loans are tied up in shadow banking activities. It's entirely possible that a failure to pay mortgages leads to contagion, especially because the mortgages aren't even backed by anything in many cases. In some ways, we're already seeing contagion. A lot of these developers are folding due to new regulations on how much debt developers can take on.
  - jpgvm 4y ago
    It does answer the question you just want to look past it. Chinese state-owned commercial banks (SCOBs) account for ~40% of the market alone, another 40% or so is rural banks etc, all of which are under incredibly strict regulation. You can't compare the state of US banking in 2008 to what we currently see in China, they aren't even remotely close in terms of regulation, capital requirements and auditing. Current day US banks probably have less stringent stress tests than SBOCs. Shadow banking and privatized loans are definitely a risk but they don't represent the same scale of risk as we saw in 2008. It's almost certain they explode but I don't think it's possible that such a small portion of the market can markedly affect the financial stability of the nation as a whole.
    - atwood22 4y ago
      > 40% or so is rural banks etc Aren’t those the banks that were taken over by gangs and has their funds embezzled? You’re painting way too rosy a picture of the Chinese financial system. It’s taken months to make rural depositors while after having their money stolen. They’re still waiting.
      - dirtyid 4y ago
        ~300/4400 banks represening ~1% (I think 500B USD worth) of total PRC banking assets fell within the high risk category according to PBOC audit last year. Which included the rural banks running the high interest scam by gangs hence the April crack down. For reference the 24 major banks hold 70% of assets. Interestingly these stats were released in PBOC Q1 press briefing in mid April that seems to coincide with hammer falling on these banks. It's a hit on small rural bank reputation, but it's not catastrophic. Shouldn't be surprise it will take months to untangle mess and determine whether / who should be compensated by national bank insurance scheme for non-compliant transactions from obvious scam (10% interest). So far they've settled to compensate clients with 50k rmb or less on Monday to spare small time dummies who got scammed. Questionable if larger depositers will, or should be compensated.
HWR_14 4y ago
> How are over-leveraged developers that different from what caused the 2008 global financial crisis? The cause of the GFC was that assets were labeled as safe but were in fact unsafe. US (and Western Europe) loans backed by residential real estate were considered "safe" by the world. Loans in China that outside parties need to work backchannels to be allowed to get into will never be considered that safe.

jpgvm 4y ago

It matters because of contagion. As it stands there are individuals at risk of being over-leveraged by having a loan on a asset that doesn't currently exist (but probably will, CCP has a way of compelling such things to happen) or has dropped in value compared to when they bought it (most likely). Developers and construction companies are also in hot water as their business models relied on continually pre-selling apartments to provide liquidity for their operations. This is where the similarities end vs 2008. The main issue with 2008 wasn't the housing bubble itself, such bubbles are normal and happen all the time. The issue was the extent of the financial over-leveraging (due to deregulation) by the financial firms which threatened the solvency of Main st and Wall st banks alike and the incentives that came out of the synthetic financial products that were engineered over baskets of mortgages. Namely a reduction in qualification for sub-prime loans and increased incentives to offer variable rate mortgages with cliff clauses + continual refinancing + speculation + flipping etc. Essentially normal people losing their house == expected (though sad still) and would have caused a moderate recession (again, expected). However because of how overleveraged the banks themselves were they collapsed, this spread (contagion) to pension funds, equities, everywhere essentially and because these assets and positions in the funds and banks were held across the world it resulted in the -global- financial crisis rather than a contained RE bubble popping.

jollybean 4y ago
Yeah, dude, the number of 'normal people losing their homes' will create a revolution, and/or, consumer spending will crash, combined with the fact that a 'major component of GDP has crashed' (i.e. construction), that's 'extremely bad'. The US was able to 'rebalance' by propping up some banks - but in reality they saved 'consumers' by taking toxic loan assets of banks balance sheet and absorbing it onto the fed balance sheet. CCP can't really do that for houses that are not built. The other issue is the size of that part of the economy in relative terms. This is is not going to 'blow over' - everything, including Xi's totalitarian takeover, increased control and repression, issue of age, diminishing marginal returns to growth ... ... this adds up to a 'major shift' in what China is. We saw a different China in the 1990s (quietly building), 2000's (onto the world stage), 2010 trying to be a global superpower, threatening Taiwan, occupying S. China Sea etc, and now 2020's 'reckoning /rebalancing'.
- jpgvm 4y ago
  As I said, I will believe it when I see it. Heard the same doomsday stories over and over at this point. The most likely way this plays out is CCP slowly nationalizes Evergrande and other embattled developers (bond holders and equity investors 100% screwed), sell the unfinished projects to developers that didn't run themselves into the ground for them to be completed. This is already happening. As much as people want to believe there will be collapse I just see it as incredibly unlikely given both track record and the iron grip that CCP has over the Chinese state banks. Without a failure in the banking sector I just don't see significant enough contagion to cause long-term damage.
- JumpCrisscross 4y ago
  > taking toxic loan assets of banks balance sheet and absorbing it onto the fed balance sheet This is not what happened. (The Fed never bought the toxic assets. It bought Treasuries and super-safe nontraditional assets off owners of toxic assets so they had the liquidity to resolve themselves. But the toxic stuff ended up in other places.)
  - jollybean 4y ago
    No, the Central Banks give banks cash in return for garbage mortgages. Look at the giant bump in 2008 in Fed assets. Most of that is mortgages. And then in 2019 an even bigger calamity. Those massive jumps represent the finantialization of the USA, a massive form of economic shift. [1] https://wallstreetonparade.com/2022/06/fed-data-shows-a-half-century-of-moderate-growth-in-the-feds-balance-sheet-through-two-world-wars-then-a-seismic-explosion-under-bernanke-yellen-and-powell/ https://wallstreetonparade.com/2022/06/fed-data-shows-a-half...
    - JumpCrisscross 4y ago
      > Central Banks give banks cash in return for garbage mortgages There are zero mortgages on the Fed’s balance sheet. There has never been a mortgage on its balance sheet. If you think the Fed bought whole mortgages off banks for keepsies, or lost a single cent on its bailouts, you’ve missed something.
atwood22 4y ago
This doesn't answer the question. China also sells mortgage backed securities and has parts of its financial sector operating with little regulation. Something like 40% of outstanding Chinese loans are tied up in shadow banking activities. It's entirely possible that a failure to pay mortgages leads to contagion, especially because the mortgages aren't even backed by anything in many cases. In some ways, we're already seeing contagion. A lot of these developers are folding due to new regulations on how much debt developers can take on.
- jpgvm 4y ago
  It does answer the question you just want to look past it. Chinese state-owned commercial banks (SCOBs) account for ~40% of the market alone, another 40% or so is rural banks etc, all of which are under incredibly strict regulation. You can't compare the state of US banking in 2008 to what we currently see in China, they aren't even remotely close in terms of regulation, capital requirements and auditing. Current day US banks probably have less stringent stress tests than SBOCs. Shadow banking and privatized loans are definitely a risk but they don't represent the same scale of risk as we saw in 2008. It's almost certain they explode but I don't think it's possible that such a small portion of the market can markedly affect the financial stability of the nation as a whole.
  - atwood22 4y ago
    > 40% or so is rural banks etc Aren’t those the banks that were taken over by gangs and has their funds embezzled? You’re painting way too rosy a picture of the Chinese financial system. It’s taken months to make rural depositors while after having their money stolen. They’re still waiting.
    - dirtyid 4y ago
      ~300/4400 banks represening ~1% (I think 500B USD worth) of total PRC banking assets fell within the high risk category according to PBOC audit last year. Which included the rural banks running the high interest scam by gangs hence the April crack down. For reference the 24 major banks hold 70% of assets. Interestingly these stats were released in PBOC Q1 press briefing in mid April that seems to coincide with hammer falling on these banks. It's a hit on small rural bank reputation, but it's not catastrophic. Shouldn't be surprise it will take months to untangle mess and determine whether / who should be compensated by national bank insurance scheme for non-compliant transactions from obvious scam (10% interest). So far they've settled to compensate clients with 50k rmb or less on Monday to spare small time dummies who got scammed. Questionable if larger depositers will, or should be compensated.

HWR_14 4y ago

> How are over-leveraged developers that different from what caused the 2008 global financial crisis? The cause of the GFC was that assets were labeled as safe but were in fact unsafe. US (and Western Europe) loans backed by residential real estate were considered "safe" by the world. Loans in China that outside parties need to work backchannels to be allowed to get into will never be considered that safe.