Not only Evergrande, China has so many slow-exploding debt bombs
Evergrande's total assets were larger than the entire U.S. subprime bubble in 2008. Lehman Brothers, the trigger of the global financial crisis, was in fact better-capitalized than Evergrande today. Even so, Evergrande is still too small a problem, because the Evergrande-style business model that has been replicated in China over the past two decades is the big deal. Exaggerating, real estate (real estate) has turned Chinese banks and local governments into hostages...
The problem of insolvency of the debt bomb China Evergrande is not a small one, but it is not a big deal or the only risk that China faces. The point is, Evergrande is just the tip of the iceberg, just a symptom of a faulty economic model, a growth model that relies on leveraged debt and GDP that grows at any cost with ghost cities, Unused infrastructure, abandoned public works…
50 ghost cities and 64.5 million uninhabited apartments scattered across China
Imagine, since 2018, according to ABC News and South China Morning Post, there are more than 50 ghost cities and 64.5 million uninhabited apartments scattered across China. However, many cities and real estate projects are still being invested and built.
In these ghost cities, everything is available, from close-up buildings to parks, lakes, well-planned transportation systems, only missing people. The paradox is that people cannot afford a place to live because housing prices are constantly increasing.
So how many Chinese property developers have poured money into these ghost cities? From 2018 to 2021, when the Chinese real estate market is increasingly gloomy, how many new ghost cities are born? What will be the fate of the real estate giants who create ghost cities, this userless infrastructure? Has Evergrande contributed at all to these abandoned real estate projects?
50 ghost cities, and 64.5 million uninhabited apartments scattered across China. Many experts and financial institutions are constantly warning about the real estate debt bubble of this economy... (Photo: jiawei cui / Pexels)
A real estate business model like Evergrande is not uncommon in China. A series of Chinese companies are heavily indebted, they have no choice but to continue to borrow frantically to make up for dwindling revenue streams and low profit margins. The question is, why are Chinese commercial banks still lending money to these real estate giants, and why are they still able to borrow money despite their bad financial situation? Why do ghost projects continue to be built despite its poor performance? The answers to all of these questions will expose the crux of China's economy's biggest risks, leaving the country exposed to massive corporate debt bombs across the country and leaving Evergrande in the middle of nowhere. It's just a small story in a bigger mess.
Big trouble
The central government needs high growth results to maintain stability in the country; Local governments are assigned targets and chase GDP growth records regardless of the long-term consequences to please the central government. So land, the ideal resource is fully exploited to serve growth. Real estate companies have become the backyards of local governments, pets, and debt instruments of local governments. These real estate businesses have access to preferential land resources, are awarded public investment projects, and are guaranteed loans by local authorities (formal or unofficial) at commercial banks. ) local and financial markets… In return, these 'real estate backyards' are ready to do all kinds of projects big and small, whether it's ghost cities or unused public works to help the local increase GDP in their mission. period.
According to Dinny McMahon, author of China's Great Wall of Debt, after the 2008 global financial crisis, local governments tried to promote growth. economy by promoting infrastructure construction and stimulating the real estate market. Because of this, private companies and state-owned companies race to pour money into construction projects with low use, causing waste. In addition, the massive construction of urban areas also comes from the over-optimism of investors when they believe that the real estate market can only grow and go up. But why isn't China moving towards a more sustainable growth strategy instead of risking the best global growth outcomes? Environmental failure, social contradictions growing in the heart of Chinese society are the opposite side of this policy of pursuing this growth record.
Looking at the 70-year history of the current administration, the failures in the centrally planned economic policy, the "Great Leap Forward"... have prompted the government to use theoretical numbers. in the era of integration to defend its legitimacy. Therefore, in the Revising U.S. report. Grand Strategy Toward China (roughly translated as Readjusting the US Grand Strategy towards China), Blackwill & Tellis (2015) asserted: "High GDP growth is the legitimate basis of the Chinese government's existence".
On the contrary, real estate also turns Chinese commercial banks into its hostage, commercial banks find ways to lend loans to real estate businesses to maintain the market value of real estate and avoid system breakdown. According to statistics, bad debt in Chinese banks/total outstanding loans is currently 1.755%. However, China's bad debt is currently not calculated by international standards because of its unique debt classification.
According to an announcement by HSBC in 2016, China's bad debt classification is as follows: First, bad debts are rated by commercial banks themselves based on the price of collateral. Even if the customer has completely lost the ability to repay both the interest and the principal, the commercial bank will still rank the debt as a good debt (class 1) - if this commercial bank assesses the value of the collateral is still greater the value of the customer's loan at that bank.
Second, when bad debts are too large, small commercial banks cannot "suffer", the worst debts are securitized and sold on the market. However, only the large commercial banks in the system buy back these debts (required by the government), and they record them as "investment in securities". In terms of form, bad debt disappeared from the books, but in fact, the debt volume is getting bigger and bigger and cannot be handled in the commercial banking system of this country.
to be continued
Tổng tài sản của Evergrande lớn hơn toàn bộ bong bóng nợ dưới chuẩn của Mỹ hồi năm 2008. Lehman Brothers, cú huých gây khủng hoảng tài chính toàn cầu, khi đó thực tế có mức vốn hoá tốt hơn cả Evergrande hiện ...
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