What we’re reading (9/24)
“Evergrande Debt Crisis Is Financial Stress Test No One Wanted” (Bloomberg). “Sunny Peninsula…was supposed to house 5,000 families in dozens of towers spread across an area the size of 30 soccer fields. Many of the buyers were white-collar workers benefiting from the fastest urbanization in human history. But the project now looks more like the set of a disaster movie. Half-finished apartment blocks stand empty and abandoned…China Evergrande Group, until recently the world’s largest property developer, owns dozens of stalled sites like Sunny Peninsula across China. Buckling under more than $300 billion in liabilities, the company is close to collapse, leaving 1.5 million buyers waiting for finished homes.”
“Who’s Buying Evergrande?” (New York Times). “International investors in Evergrande’s bonds are preparing for turmoil — and in some cases buying more. Evergrande’s debt is in the portfolios of man major investment firms, and some hedge funds have been adding more to their holdings as prices have tumbled. A group of bondholders has tapped restructuring advisers at Kirkland & Ellis and at Moelis. For its part, Evergrande has hired the firms Houlihan Lokey and Hong Kong Admiralty Harbour Capital. How might the negotiations play out?”
“Evergrande’s Struggles Reflect China’s Efforts to Rein in Multiyear Debt Boom” (Wall Street Journal). “China is hardly alone in its fondness for debt, but unlike the U.S., China doesn’t borrow to cut taxes or finance social transfers. It instead invests in manufacturing, infrastructure and property. It is a logical model so long as the investment genuinely makes the country more productive. For a long time, it did. But China isn’t immune to the law of diminishing returns. Since 2008, it has needed ever more debt to deliver the same increment to economic output. Between 2008 and 2019, total debt—government, household and business—rose from 169% to 306% of gross domestic product, but GDP growth fell from 10% to 6%.”
“Evergrande’s Crisis Highlights China’s Shortcomings” (The Economist). “Part of what makes China’s financial industry daunting is its size. Banking assets have ballooned to about $50trn and they sit alongside a large, Byzantine system of shadow finance. Total credit extended to firms and households has soared from 178% of gdp a decade ago to 287% today. The industry suffers from opacity, a lack of market signals and the erratic application of rules. Property is part of the problem. Families funnel their savings into apartments rather than casino stockmarkets or state-run banks. Real-estate developers raise debts in the shadow-banking system in order to finance epic construction booms. As well as being big, the system is inefficient at allocating capital, dragging down growth.”
“Why The Head Of The IMF Should Resign” (The Economist). “A new investigation has found that [World] [B]ank staff improperly altered the scores of China and three other countries. They wanted to spare China an embarrassing fall in the [Doing Business] rankings in 2017, just as its reforms were gathering steam. According to the investigation, the China tweaks were carried out at the behest of the bank’s then president, Jim Yong Kim, and his second-in-command, Kristalina Georgieva, who is now head of the IMF.”
