China Starts to Crack?

[GRG55]

Re: China Starts to Crack?

I see China just "Reminded" Germany that if Europe bands its IT equipment then it would have to "Look at the safety" of Germany cars..........

The Gloves are coming off

I am old enough to remember in the 1980s and early 1990s about talk of China's market of one Billion people. Only problem was most of them couldn't rub two yuan together - a Billion people with no money to spend. Might be a shift back in that direction coming over the horizon. As the phenomenal amount of officially sanctioned credit that has been supporting the Chinese "miracle" economy dries up the value of the Chinese domestic market for exporters to China will also decline.

The next phase of this rolling credit market crisis may appear in the European banking system. And if that is the case the Germans will have bigger problems than the "safety" of the cars they are sending to China to worry about. It's difficult to imagine the allegedly strongest national economy in the Euro currency zone is host to some of the EU's largest banks in the most parlous condition.

[jk]

Re: China Starts to Crack?

aside on germany: according to harald malmgren merkel long ignored pleas from german industrialists to pay more attention to, and take a softer stand on brexit. 20% of german car production goes to the u.k.

again according to malmgren - german carmakers have for some time been planning to move more production to the u.s to escape the eu regulatory and tax environment, and as a more recent consideration to avoid possible tariffs. [check out malmgren's wikipedia page - he says his statements are based on direct conversations with his contacts all around the world.]

also, irrespective of "looking at the safety," chinese auto sales across the board just dropped for the 17th straight month.

german carmaggedon.

[Mega]

Re: China Starts to Crack?

Nixon took a like to him.........I think Nixon was a BLOODY good Prez, got control of spending & inflation (after the DNC years) brought the Troops home, Got into China, did deals with CCCP.............& had that Silly business in the Watergate building......

[GRG55]

Re: China Starts to Crack?

This just sounds so typically Chinese. One of the most prestigious Universities in the country is floating bonds to fund an "industry and investment conglomerate" with activities in financial services, real estate, health care and manufacturing.

Pretty obvious most of those "miracle economy investments" are now likely valued at below book, and none of them are liquid enough to sell in order to fix the balance sheet. The solution? See penultimate paragraph below.

https://www.caixinglobal.com/2019-12-04/exclusive-founder-warns-of-extremely-tight-liquidity-after-bond-default-101490292.html

Dec 04, 2019 07:31 AM

Exclusive: Founder Warns of ‘Extremely Tight’ Liquidity After Bond Default

Chinese industry and investment conglomerate Peking University Founder Group Co. is facing “extremely tight” cash flow after missing a bond payment and is seeking strategic investors for a restructuring, the company said.

Founder, which is 70% owned by Peking University, rocked the market Monday by failing to repay a 270-day, 2 billion yuan ($285 million) bond. Founder’s default underscored financial strains squeezing Chinese businesses amid slowing economic growth. About 45 companies defaulted on 120 bonds involving 102.9 billion yuan as of mid-October, Bloomberg data show.

The default also escalates concerns about the weak finances of debt-laden business arms of Chinese universities. The company and Tsinghua Unigroup Co., a top chipmaker run by archrival Tsinghua University, have been under the spotlight in recent months following a tumble in their dollar bonds...

...A Caixin calculation based on market information showed that Founder has 23 outstanding bonds worth 34.5 billion yuan on the domestic market, along with an additional $3.2 billion of dollar bonds issued abroad. Market investors have shown growing concerns over Founder’s worsening debt woes. Company reports showed that from 2016 to 2018, Founder’s overall debt-to-asset ratio climbed from 76.8% to 81.8%. The ratio further rose to 82.8% by September this year.

Founder management attributed the worsening financials to graft scandals involving some of the company’s former executives and its long-running business disputes with Beijing Zenith Holdings, a property developer controlled by fugitive businessman Guo Wengui.

Founder claimed 14 billion yuan of unpaid receivables from Beijing Zenith, which the company expected to be recovered in the first half this year but which wasn’t, according to Zhu Yuhai, Founder chairman.

“It also caused the current trouble,” said Zhu at the Tuesday briefing...

...Earlier this month, media reported that Founder may invite state-owned Zhuhai Huafa Group as a strategic investor. Company executives Tuesday denied the report but said the company has contacted many state-backed institutions as potential investors, including the state-owned asset administrator of Zhuhai.

Founder is in intensive communication with potential partners and seeking to introduce large centrally owned enterprises as strategic investors, said Xiao Qun, chairman of Beijing Peking University Asset Management Co., a wholly owned unit of Peking University and the controlling shareholder of Founder.

[GRG55]

Re: China Starts to Crack?

No comment necessary.

https://www.nytimes.com/2019/12/12/business/china-default.html

China’s Companies Binged on Debt. Now They Can’t Pay the Bill.

Rising bond defaults raise new questions about whether Beijing can effectively address its huge debt problem.


HONG KONG — China’s companies racked up some towering bills as they expanded, and the world’s investors and lenders rushed to offer them even more money.

Now the bills are coming due, and a growing number of Chinese companies can’t pay up, in a sign that the world’s No. 2 economy is feeling the stress from its worst slowdown in nearly three decades.

Two high-profile companies — a giant government-run trading firm and a conglomerate backed by China’s most distinguished university — are the latest to join a long list of Chinese businesses that have run short of cash when it was time to pay back their debts. Chinese corporate borrowers have defaulted on nearly $20 billion in loans this year.

The amount is small compared with China’s overall economy, but the toll is rising. Chinese companies owe hundreds of billions of dollars in debt that is coming due over the next two years, including more than $200 billion owed to lenders and investors around the globe...

...“This is not over yet,” said Christopher Lee, a China credit specialist at S&P Global. “We are expecting defaults to rise. There are many other companies that are operating in a very difficult environment.”...

...“It’s quite a hairy situation,” Mr. Lee said. “Many investors expected Tewoo would at least pay off its offshore debt.”

Citing the Tianjin government, which has its own debt problems, Mr. Lee added that “the state just doesn’t have the ability to support it anymore.”...

...A decade ago, when the global financial crisis threatened world growth, China began a giant stimulus push to build roads and bridges and create jobs. To fund it, banks lent heavily and local governments began raising money.

The push resulted in the largest credit expansion by any single country, in terms of the size of its economy. The banking system more than quadrupled in size, from $9 trillion at the end of 2008 to $40 trillion today...

...According to S&P Global, Chinese companies must pay back $90 billion in debt denominated in American dollars, meaning the lenders are global companies and investors outside China. In 2021, an additional $110 billion will come due...

[llanlad2]

Re: China Starts to Crack?

Some will recall my longstanding assertion that one important element of the so-called "Chinese Miracle" was (is?) the longest and greatest misallocation of capital in human history.

Well capital and capitalism are human tools and constructs which the Chinese have used successfully to raise the living standards of hundreds of millions of people in the last 30 years. So for the Chinese I would say it is the GREATEST allocation of human capital in human history. The capital, both intellectually and technologically is now matching the US's with half of all global patents now registered by China. China is second only to the US in terms of millionaires so it's fair to say that financially they are stronger than you admit. Huawei is the perefct example of a company that threatens US hegemony-it is technologically more advanced than equivalent US companies and sells its services and goods at a lower cost. This explains why the US is resorting (quite rightly in my opinion) to protectionism. The

"...From rural bank runs to surging consumer indebtedness and an unprecedented bond restructuring, mounting signs of financial stress in China are putting the nation’s policy makers to the test.

Xi Jinping’s government faces an increasingly difficult balancing act as it tries to support the world’s second-largest economy without encouraging moral hazard and reckless spending. While authorities have so far been reluctant to rescue troubled borrowers and ramp up stimulus, the costs of maintaining that stance are rising as defaults increase and China’s slowdown deepens.

Among China’s most vexing challenges is the deteriorating health of smaller lenders and regional state-owned companies, whose financial linkages risk triggering a downward spiral without support from Beijing. A landmark debt recast proposed this week by Tewoo Group, a state-owned commodities trader, has raised concerns about more financial turbulence in its home city of Tianjin..."

LOL. It's never "different this time". And no, the Chinese didn't create some miraculous new economic model under the absolute, perfect, error-free central control of the National People's Congress and the PBOC.

No one pretended that they did. All markets are planned to some extent anyway-including the US's. It's just a matter of degrees and policy. China 2020 is not China 1960.

Chinese governments have been at the forefront of increasingly "reckless spending" for more than two decades. I have long argued on this forum the Chinese governments (with no small amount of help from multinational corporations, the global banks and LDC kleptocrats) were sponsoring the greatest misallocation of capital in history, that the massive capacity additions (exemplified by steel, cement, power plants and entire empty cities) were an absurdity and the so-called "Chinese Miracle" would eventually prove to be a chimera (along with such nonsensical constructs as BRICS). Is there anyone here that doesn't think the Belt and Road initiative is really to soak up all that otherwise useless processed materials and manufactured goods capacity China has installed?


The misallocation of assets may be true - but it doesn't matter if you're Chinese. You are getting paid to work and the wealth gets spread around. It also pales into insignificance when you compare it to the misallocation of capital by your biggest competitors. The US has misallocated TRILLIONS of dollars on manufacturing high tech military equipment AND fighting and losing wars with no obvious gain in the last 20 years. America's greatest advantage in the 20th century was that it was continent sized and geographically it was isolated from the threat of invasion. lt inherited all of Europe's capital after WW1 and WW2. And as for China's Belt and Road Initiative- that's a straightforward copy of the Marshal Plan if you ask me. Soaked up all the excess manufacturing capability the US had installed after WW2. And it worked out pretty well for all concerned. What's the difference?
Tewoo Offshore Bondholders Take Heavy Losses to Exit

Dec 13, 2019 05:00 AM

So far, only 10% of investors chose to swap their debt, while 80% elected to sell back at a loss and 10% haven’t made a decision, Caixin learned from investors. For two other bonds due in 2020 and 2022, about 80% of investors chose sell back at discounts as deep as 47%.

The discount on $450 million of perpetual bonds with a coupon rate of 5.8% is even deeper at 64%. Investors can also choose to swap the bond for new debt due 2039 at a coupon rate of 1.6%. About 40% of holders of the perpetual bond chose the swap option because the sellback price is too low and some domestic institutional investors want to wait and see, some investors said.

Among the total $1.25 billion of bonds, only about $100 million were swapped for new debt, and $100 million of perpetual bonds were swapped, meaning the new bonds will have very limited liquidity, investors said...

How much corporate debt has been taken on to fund buybacks in the US? Even to non-profitable companies. It must dwarf that of the Chinese.

I am old enough to remember in the 1980s and early 1990s about talk of China's market of one Billion people. Only problem was most of them couldn't rub two yuan together - a Billion people with no money to spend. Might be a shift back in that direction coming over the horizon. As the phenomenal amount of officially sanctioned credit that has been supporting the Chinese "miracle" economy dries up the value of the Chinese domestic market for exporters to China will also decline.

It's the largest car market in the world. It's basically the largest market for everything in the world. When non-Chinese companies stop wanting to build factories there and open shops there then you'll be right. But the opposite is happening.

No comment necessary.

https://www.nytimes.com/2019/12/12/business/china-default.html

China’s Companies Binged on Debt. Now They Can’t Pay the Bill.



...According to S&P Global, Chinese companies must pay back $90 billion in debt denominated in American dollars, meaning the lenders are global companies and investors outside China. In 2021, an additional $110 billion will come due...

As mentioned before it's relative. Who is going to run out of dollars first? China or US companies and US government. We got the answer when the US restarted QE. In the past the US has managed to tighten and choke off competitors by restricting dollars. The RoW and especially the Asians learned their lesson and saved for the occasion. It's the RoW who can't afford to live without Chinese goods.

There's not much to say in an environment of rampant government intervention. Is this the beginning of the end for China's Ponzi economy? It doesn't look it to me since, as I understand it, only foreign investors are affected by this haircut. Meanwhile, I'm sure the CCP will continue to endlessly bail out domestic investors to prevent a revolution.

I suspect that China's economy will only crash hard when developed nations cease conducting trade with China until the country implements earnest reforms. Considering that mercenary executives in the west (and especially America) still seem okay with technology transfers, offshoring, and other idiotic business decisions, the money will continue to flow for China. Furthermore, Trump's apparent desire to enter into a trade agreement with China (based on meaningless pledges the Chinese will not honor) also makes me think China's not going to go bust, at least not until the U.S. does so first.

I don't think anyone believes the cockamamie financial books of Chinese companies or the Chinese government itself. However, all the malinvestment in China has created a lot of real, physical infrastructure and created technology companies with know-how and some capability to manufacturing fairly high-tech product. When the Chinese bubble pops, the assets will be picked clean by Chinese vultures, not foreign vultures. So assuming that the CCP can avert a revolution if/when the Chinese economy blows up, it appears that China should be in reasonably good shape since it will have actually created something of at least somewhat enduring value.

Sadly, that is more than I can say about the U.S. It appears to me that most of the new debt created as a result of QE and ZIRP has gone to rent-seeking activities. When things blow up here, I don't think we're going to look back 10 or 20 years ago and say, "Ignoring the financial blow out (let's say we write off all the debt), the U.S. is in noticeably better shape than it was back then."

I couldn't agree more Milton. The US is desperately putting the squeeze on China through tariffs and sanctions on China's energy suppliers(Russia, Venezuala and especially Iran right now) as well pressuring its allies not to use Chinese technology (eg Huawai in UK and Europe) The US is also pumping record amounts of oil itself but still running massive deficits despite this huge economic advantage. If the US succeeds in choking China then China will crash.
I think we're going to find out soon and the tell will be the Yuan vs the Dollar. Personally I think RoW is sick of US hegemony and is positioning to end it.

[thriftyandboringinohio]

Re: China Starts to Crack?

... Personally I think RoW is sick of US hegemony and is positioning to end it.

That's an important factor.
For the last 20 or 30 years the US has been more tolerated than beloved, and we seem to find new ways every day to put salt on those wounds.

[lakedaemonian]

Re: China Starts to Crack?

Personally, I think the Huawei issue has a few layers:

1)Marc Andreeson’s quote “Software is eating the world” includes geopolitics.

The Geopolitical king is dead, long live the Geodigital king.

We haven’t even begun to truly consider the implications of true partnership between sovereign superpowers and digital superplatforms.

Many are familiar with Moore’s Law and Metcalfe’s Law, fewer so with Zipf’s Law of distribution.

They can all be applied to geopolitics via the aforementioned superpower & superplatform partnership.

So the Huawei issue has national strategic implications

2) PRC/PLA subsidy of Huawei to a massive extent, akin to semiconductor market protectionism and motorcycle price fixing/dumping of 1980’s Japan on a global scale.

Arguments can be made that Huawei is both unfair(commercially) and unsafe((GeoDigitally).

Huawei is NOT Emirates acting like the door to spark Dubai.

Huawei is the door to One Platform, One Network(digital analog to One Belt, One Road Initiative).

Having said that, I agree with the narrative that people are unhappy with US led unipolar power.

And I agree with the need for a competitive option beyond Brand USA.

I reckon that US global power and influence is inversely proportional to US foreign policy humility.

As China rises, the US foreign policy posture will adapt for the better, eventually.

Monopoly makes superpowers fat, lazy, and complacent.

Competition will hopefully be a forcing function for a better US foreign policy.

And hopefully, that’s before Zipf’s Law kicks in and locks in distribution with 1st place GeoDigital winner taking a permanent majority.

[touchring]

Re: China Starts to Crack?

It's the RoW who can't afford to live without Chinese goods.

What Chinese goods you can't live with? People just need to learn how to live like they did 30 years ago, buy stuff you only need, buy durable stuff that lasts for years, buy used goods, sell away stuff you don't need.

[jk]

Re: China Starts to Crack?

What Chinese goods you can't live with?

melamine spiked baby formula, contaminated generic drugs, lead paint coated children's toys and other essentials.

[thriftyandboringinohio]

Re: China Starts to Crack?

melamine spiked baby formula, contaminated generic drugs, lead paint coated children's toys and other essentials.

LOL!

But in reality we have set up long supply chains that wrap around the world and pass through lots of countries.
If we imagine a sudden and total embargo on all goods from China, I doubt that we could build cars or passenger jets or washing machines or cell phones.

People who don't work in manufacturing might be surprised at the number of individual piece parts that go into a product, especially electronic circuit boards.
By "piece part" I mean a thing that can't be divided into smaller sub components - a single rivet or a single resistor or a special paint coating.

We enjoy the low prices we get from global economies of scale for these piece parts, but that has resulted in near monopolies for each of them, with only one or two or three factories in the whole world making each one.
If we boycott China we'll need to build factories and machinery to start producing these ten cent piece parts by the million, and they won't be available for the 3 years it would take to gear up to build them in the US or Europe.

A few years ago there was a typhoon in southeast Asia that damaged factories in Thailand and Cambodia.
Our local Honda final assembly plant shut down for weeks and no Civics or Accords were built because they could not get the components made at that factory - a power steering pump or brake cylinder or whatever it was.

[touchring]

Re: China Starts to Crack?

A lot of people are still thinking that wages in China are like 1-2$ an hour since they are still making 10 cent parts. Fact is a lot of manufacturing is already done by robots and machines.

https://www.statista.com/statistics/...manufacturing/

LOL!

But in reality we have set up long supply chains that wrap around the world and pass through lots of countries.
If we imagine a sudden and total embargo on all goods from China, I doubt that we could build cars or passenger jets or washing machines or cell phones.

People who don't work in manufacturing might be surprised at the number of individual piece parts that go into a product, especially electronic circuit boards.
By "piece part" I mean a thing that can't be divided into smaller sub components - a single rivet or a single resistor or a special paint coating.

We enjoy the low prices we get from global economies of scale for these piece parts, but that has resulted in near monopolies for each of them, with only one or two or three factories in the whole world making each one.
If we boycott China we'll need to build factories and machinery to start producing these ten cent piece parts by the million, and they won't be available for the 3 years it would take to gear up to build them in the US or Europe.

A few years ago there was a typhoon in southeast Asia that damaged factories in Thailand and Cambodia.
Our local Honda final assembly plant shut down for weeks and no Civics or Accords were built because they could not get the components made at that factory - a power steering pump or brake cylinder or whatever it was.

[thriftyandboringinohio]

Re: China Starts to Crack?

A lot of people are still thinking that wages in China are like 1-2$ an hour since they are still making 10 cent parts. Fact is a lot of manufacturing is already done by robots and machines.

https://www.statista.com/statistics/...manufacturing/

Spot on , touchring.
I've never traveled to China to see a factory, but my associates have.
They describe huge gleaming plants that are state-of-the-art technically, the equal of anything in Germany, Japan, or the US.

[davidstvz]

Re: China Starts to Crack?

A few years ago there was a typhoon in southeast Asia that damaged factories in Thailand and Cambodia.
Our local Honda final assembly plant shut down for weeks and no Civics or Accords were built because they could not get the components made at that factory - a power steering pump or brake cylinder or whatever it was.

That sounds like the same event (or same kind of event) that took out a good portion of world-wide hard-drive manufacturing facilities in 2011 which were in Thailand. There was a noticeable shortage of large and cheap hard drives for a good year or more after the event once the effects rippled into the supply chain. I think price per GB nearly doubled for some size ranges, and that's in sharp contrast to the usual steady reduction in such prices due to Moore's law (what's left of it anyway).