Can someone explain to me why is this problem? The houses that they've built are still standing, people can still live in them, what's the problem?
There are a number, and I mean a large number of issues. I'll just pick a few 1.) as of 2021, There are nearly 800 unfinished Evergrande projects in more than 200 cities across China. https://www.nytimes.com/2021/09/28/business/china-evergrande... . Even if the buildings were unfinished, the buyer still had to keep paying the mortgage!! and if they didn't, and the courts foreclosed the property and sold it, the buyer…
Evergrande shares plunge as much as 87% as trading resumes after 17 months
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Re: Evergrande shares plunge as much as 87% as trading resumes after 17 months
#102As a lay person, it has been extremely difficult to figure out what is going on. I have a weak grasp on four points(with low confidence on any of them being completely accurate): 1. There is an excess supply of apartments including the ones that have already been sold. The demand side is mostly people buying second and third units as investments. 2. China is going through a weird demographic situation. The younger ge…
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Re: Evergrande shares plunge as much as 87% as trading resumes after 17 months
#103As a lay person, it has been extremely difficult to figure out what is going on. I have a weak grasp on four points(with low confidence on any of them being completely accurate): 1. There is an excess supply of apartments including the ones that have already been sold. The demand side is mostly people buying second and third units as investments. 2. China is going through a weird demographic situation. The younger ge…
> Thing is, all four of these can not possibly be right. It’s a little too insane. Whoever is on the other side of all those mortgages should have abandoned ship a long time ago otherwise.
Why can't all 4 of these be right? "A little too insane" defines every bubble in hindsight.
Point to a bubble w/ a collapse and I'll give you a set of statements that are "a little too insane" such that fundamentals don't hold up.
My guess is you're gobsmacked by the idea that the fundamentals don't hold up and are saying "how can anyone be that stupid?". They didn't in 99, nor 08, nor Gamestop, nor now.
Everything can be wrapped under Greed.
[Edit] Full disclosure, I'm no better - I've lost money chasing greed.
Re: Evergrande shares plunge as much as 87% as trading resumes after 17 months
#104As a lay person, it has been extremely difficult to figure out what is going on. I have a weak grasp on four points(with low confidence on any of them being completely accurate): 1. There is an excess supply of apartments including the ones that have already been sold. The demand side is mostly people buying second and third units as investments. 2. China is going through a weird demographic situation. The younger ge…
The problem started long time ago when the central government took most of the tax revenue from the local provincial and city governments leaving them without funding to operate. As a compensation, they were granted the authority to sell the land use right of their lands. Land is never privately owned in China. What is sold is the right to use the land for a period of time.
Since the state owned all the lands and the local governments as the sole supplier of lands, they became a monopoly in land sale. As with any monopoly especially a unchecked one they pushed to raise prices all the times to gain maximum profit. The regulation and policies of the governments aimed to build more and to keep raising the property price years after years because that's what brought in the money.
It has become unsustainable as people couldn't afford the high price. There're a glut of houses and sales have been slow yet the governments have prohibited the lowering of the price as lower housing price means lower tax revenue. There're some cases when developers lowered the price and got hit with huge fine and jailed.
High price and slow sales mean the developers like Evergrande cannot get rid of the inventory to get the capital back to fund further development. They have already sold the not-yet-built houses for the next phase but have run out of money. Couple years back the central government had forced the banks to put in severe limits on loans to the developers. They turned to shadow banks like investment fund trusts to raise money but those are blowing up just now, defaulting on bond payments. They have no money to finish the projects. They owe huge amount of debts, owe huge amount of unpaid taxes, and owe the unbuilt houses to customers. They should have been bankrupted a long time ago but the governments won't let them.
This is a huge problem for China. Housing development comprises about 25%~30% of GDP; its blowup would cripple the economy. Most ordinary people's wealth are largely tied to the value of their homes; a large drop of the house value hits most people hard, forcing them to cut back on spending, further putting down the economy. The financial institutes like banks, shadow banks, investment funds, etc have lost huge amount of money as developers unable to pay back their loans and people defaulting on their mortgages. The lowering of the property value would force more loans gone underwater. There'll be a string of bankruptcy. The local governments have large revenue shortfall and yet saddled with huge debts, because guess what, they were in the game to invest to build housing. The shortfall forces them to lay off workers, cut back on salaries, cut pensions, and cut back on services. Even the central government has no money. Last year they openly said that beyond some emergency fund there's no money left.
Any option for solutions is a bitter pill and no one has the political will to do it. It's just a downward spiral.
Re: Evergrande shares plunge as much as 87% as trading resumes after 17 months
#105Having read the article but not heard of Evergrande prior to this, what are the implications of this outside of China? The article mentions that the company filed for bankruptcy in the US, but not what US operations/developments they had.
Those were financial operations. They were selling bonds outside China.
The treatment of stakeholders have also been different inside and outside of China. The assumption based on the experience so far is that inevitably overseas investors, such as US based entities, will lose out more. Chinese firms have been raising money in overseas markets and has been exporting risk in this way, the issue is how China's government will handle this against the opaque corporate structure behind these financial instruments sold overseas.
Re: Evergrande shares plunge as much as 87% as trading resumes after 17 months
#106Earlier quoted context omitted.
Evergrande sells apartments before they are built to fund construction, and the purchasers pay mortgages during the build. If the company has insufficient funds to complete ongoing construction, which gets delayed, purchasers stop paying their mortgages and the company goes into a death spiral. Meanwhile purchasers get shafted, buildings stand uncompleted, and construction workers and materials suppliers see demand c…
Note this isn't merely a Chinese thing. A variation of this is in fact the default way new units get build and sold in the Netherlands, for example. Personal anecdote. I had a mortgage for 2 full years before being able to move in to my apartment because I bought it before a single stone was laid. The way this works here is that the money is held into an escrow account for most of time, with the construction company…
I would have to assume the company didn't use those payments to fund the building of properties for earlier mortgages. The Ponzi scheme nature of it is the Chinese thing (not that it has anything to do with being Chinese, it's just the reality of Chinese real estate today and of the past decades). Paying for the construction of a new home in installments is something done across the world.
Re: Evergrande shares plunge as much as 87% as trading resumes after 17 months
#107Why isn’t it down 100%? According to the article, they’re in bankruptcy with way more liabilities than assets. Presumably the shareholders are getting wiped out.
As I understand from this "The Plain Bagel" video [0], they're not bankrupt. Instead, they're likely nearing the completion of their debt restructuring. [0] https://www.youtube.com/watch?v=c-n6RN8a2Zo
The problem is the term "bankruptcy". Colloquially people seem to think a company is just out of money. All you need to file for bankruptcy is to be unable to service debts at a specific time. It might even just be a transitory state.
Re: Evergrande shares plunge as much as 87% as trading resumes after 17 months
#108As a lay person, it has been extremely difficult to figure out what is going on. I have a weak grasp on four points(with low confidence on any of them being completely accurate): 1. There is an excess supply of apartments including the ones that have already been sold. The demand side is mostly people buying second and third units as investments. 2. China is going through a weird demographic situation. The younger ge…
These questions indicate a misunderstanding of how markets inside China work. I suggest you don't look at "what makes sense" but more look at the reality of what's happening. What you are also missing is that sometimes, parties are not allowed to abandon ship. Couples who have bought homes with mortgages but are not moved in for years are not allowed to give up, they are not allowed to stop paying on threat of impris…
> And seeming to be in control is what the government will opt for every single time in every single decision they make.
That reminds me of when the Battlefield 4 game was banned in China, because one of the antagonists was a rogue Chinese general.
I remember thinking that the game would have had better odds if the plot had been about a unified and monolithic Chinese government doing willful evil instead.
Re: Evergrande shares plunge as much as 87% as trading resumes after 17 months
#109Can someone explain to me why is this problem? The houses that they've built are still standing, people can still live in them, what's the problem?
There are videos online that show the deplorable construction standards used in some of these houses.
Re: Evergrande shares plunge as much as 87% as trading resumes after 17 months
#110As a lay person, it has been extremely difficult to figure out what is going on. I have a weak grasp on four points(with low confidence on any of them being completely accurate): 1. There is an excess supply of apartments including the ones that have already been sold. The demand side is mostly people buying second and third units as investments. 2. China is going through a weird demographic situation. The younger ge…
The problem started long time ago when the central government took most of the tax revenue from the local provincial and city governments leaving them without funding to operate. As a compensation, they were granted the authority to sell the land use right of their lands. Land is never privately owned in China. What is sold is the right to use the land for a period of time. Since the state owned all the lands and the…
"The financial institutes like banks, shadow banks, investment funds, etc have lost huge amount of money"
My understanding of the core problem is - Money has to come from somewhere. It is the result of China becoming world's workshop. Chinese have 45%+ saving rate and those powered up the FIs' balance sheets. This money funded all the buying of land rights, development of housing etc. How Chinese govt. deals with these toxic balance sheets before Chinese people decide to make a run for the banks, that will determine how this crisis unfolds. Ultimately there never is free lunch, unless you are the US which can print it's way out of any problem it creates for itself - what times!
(be aware - the comment is by some anonymous guy on the Internets. Its most value maybe as a 'mildly entertaining conjecture'.