A holiday topic starting with VOA News. “In the latest sign that corporate debt levels in China pose a threat to the broader economy, Chinese regulators on Friday were forced to halt trading in bonds issued by Evergrande, the country’s second-largest property developer. Concerns that the company will be unable to continue making payments on its obligations prompted a huge sell-off by investors, overwhelming exchanges.”
“The rush to unload bonds issued by the company — some were selling for as little as 26% of their face value — came after a report from Bloomberg that said two major trust companies that have made large loans to Evergrande had demanded immediate repayment. The crisis at Evergrande comes just days after another major Chinese firm, China Huarong Asset Management, released a long-delayed earnings report showing it had lost $15.9 billion last year and that its debt-to-equity ratio at one point totaled an eye-popping 1,333%.”
“The problem of unsustainable debt is not limited to huge firms like Evergrande and Huarong. In both 2019 and 2020, Chinese firms defaulted on more than $20 billion in debt, and analysts believe that 2021 is on pace to set a new record.”
“‘The Chinese economy has been suffering from excessive non-financial corporate debt for a long time,’ said Tianlei Huang, a research fellow at the Peterson Institute for International Economics. ‘As a result, China has a serious zombie problem. Across the country, there are probably tens of thousands zombie firms that are persistently making losses but kept alive only by continuous bank credit and government subsidies.’”
From Reuters. “Bonds issued by indebted developer China Evergrande Group slumped on Monday after a ratings downgrade led to restrictions on their use as collateral, prompting China’s stock exchanges to halt trade. The Shanghai Stock Exchange said in a statement that it had temporarily suspended trading in China Evergrande Group’s 6.98% July 2022 corporate bond following ‘abnormal fluctuations.’ The exchange had also suspended trading in the bond on Friday.”
“On Friday, China Securities Depository and Clearing Co. (CSDC) reduced the ‘conversion ratio’ of the July 2022 bond to zero, effective Sept. 7. Other Evergrande bonds were not included in CSDC’s table of conversion ratios on Friday as they no longer qualified for inclusion. The conversion ratio determines leverage limits for repo financing given a specific bond pledged as collateral. CSDC is owned by the Shanghai and Shenzhen stock exchanges.”
“A director at a local brokerage said that the reduction in the conversion ratio was a ‘grey rhino’ – a highly obvious yet ignored threat. ‘It was bound to happen.’”
The Sydney Morning Herald. “The elephant in the global room is China’s ferocious property squeeze. Xi Jinping is deliberately breaking the back of the world’s biggest financial bubble. The Chinese economy already has one foot in recession – by its own cyclical standards – and is heading for a hard-landing over the next few months as construction is starved of credit.”
‘Markets should be prepared for what could be a much worse-than-expected growth slowdown, and potential stock market turmoil,’ said Ting Lu, Nomura’s chief China economist. The scale of China’s cement addiction is eye-watering. ‘Half the world’s cranes are in China. We’re talking about 50 per cent of the global construction business,’ he said.”
“Home building and property make up 17 per cent of Chinese GDP, including furniture and appliances. The sector also generates 44 per cent of local government revenues through land sales and fees, injecting $US1.3 trillion ($1.8 trillion) a year into the economy as quasi-fiscal spending. All told, property makes up a quarter of the Chinese economy, three times the relative weighting of America’s extreme bubble in 2007.”
“Xi Jinping’s assault on property should not be confused with the stop-go cycles of the last quarter century, a form of Keynesian fine-tuning with ‘Chinese characteristics’ that has each time prevented economic slowdowns from going too far – at the cost of worsening debt ratios. The Communist Party at last seems determined to lance the boil. But Xi’s petulant shake-up of the economy is also an ideological repudiation of the Deng Xiaoping formula credited with lifting the country out of poverty. His ‘common prosperity’ campaign looks all too like a neo-Maoist purge.”
“The revolutionary mood was made all clear this week in a WeChat blog known as the ‘Li Guangman Ice Point Commentary.’ His diatribe was reprinted across the state-run media with the clear blessing of the regime. ‘Everyone can feel that a profound change is taking place,’ he stated, proclaiming an end to China’s love affair with Western culture and ‘return to the essence of socialism.’ It was framed as a fight to the death with the West, the unvarnished Xi doctrine.”
“The Party has concluded that the house price spiral is triply corrosive: it is a financial black hole; it is the chief cause of cancerous inequality; and it is a strategic threat through the demographic channel. E-house China Research says the ratio of prices to average incomes in Shenzhen has reached 43.5. Top party officials have been sacked for allowing this to happen. Local government bosses everywhere now know that they will be punished for property booms and rewarded for austerity.”
From Global News. “How did Canada’s crippling housing woes come to be in the first place? While there is no single or simple explanation, here’s a look at some of the main factors experts point to when explaining the country’s housing crisis. Economists have long pointed to low interest rates as an important factor behind Canada’s home-price boom. Another hot topic when it comes to housing is the issue of using residential real estate as an investment rather than a place to live.”
“Another concern is about investors leaving homes empty or turning them into short-term rentals. When Andy Yan, director of Simon Fraser University’s City Program, analyzed 2016 census data, he found that Metro Vancouver had more than 65,000 homes that were either lying empty or occupied for only a short period of the year, more than double the number of empty homes in 2001.”
“Yet another factor exacerbating Canada’s housing crisis is money laundering, some analyses suggest. Real estate lends itself well to money laundering, says James Cohen, executive director of Transparency International Canada. For one, real estate purchases are a way to launder large sums of dirty money. And when real estate goes up in value, it becomes an even better deal for criminals, Cohen adds. Organized crime across the world uses real estate to launder money, but Canada’s pristine international reputation and lax anti-money laundering regime have made it an especially attractive destination for crooks looking for a place to park their funds, Cohen says.”
The Globe and Mail. “An internal Canada Revenue Agency audit concluded 25 years ago that wealthy new immigrants were buying up most of the priciest houses taken from a sample in and around Vancouver while declaring poverty on their tax returns. But the report was not made public until a five-year access-to-information battle concluded recently.”
“Housing and immigration academics say the study could have warned the public about the scale of foreign money being parked in Metro Vancouver’s residential real estate – decades before the provincial government began taking meaningful action to slow this trend. Vancouver lawyer Richard Kurland, who has been helping international clients immigrate to B.C. for 25 years, said the analysis proves the CRA failed to catch those hiding their global income while competing for homes on Canada’s West Coast.”
“‘They knew it was happening and did nothing, so the bleeding continued, taxes were not paid, property was subject to speculation and the end result [is] people in Vancouver are paying many more times than they have to for residential property because the CRA did nothing when it was warned by its own employees about what was going on,’ he said.”
From Curbed New York. “In March 2020, Steven Jiang, who lives in Ningbo, a coastal city in Southeast China, was thinking of buying a house in New York City. The father of two, who made a good living as the owner of a transportation company, wanted to do what many upper-class Chinese parents have: He planned to move his family to the U.S. in a few years so his preteen daughters could attend American boarding schools. So he contacted a New York City broker whom a friend had introduced him to before the pandemic.”
“But that summer, the friend, who had lived in New York for two years, fled back to China. He told Jiang it was prompted by what seemed to be a losing war against the virus in the U.S., the riots accompanying the Black Lives Matter protests, and the rise in violent attacks on Asian Americans. Now Jiang has postponed his plans to buy in the city. ‘The pandemic has revealed a lot of negative characteristics about the U.S. that I hadn’t realized before,’ he said.”
“For the past six years, house hunters like Jiang have made China the top international source of U.S. home buyers. But this year, the Chinese dropped to third place, after Canadians and Mexicans, according to the annual survey of foreign home purchases released by the National Association of Realtors (NAR).”
“Although New York is still one of the top three locations in the U.S. for Chinese buyers, the real-estate business is taking note of their waning interest. ‘I had many potential clients at the beginning of the pandemic, and then, they all dropped off,’ said Chloe Ren, founder of the Chloe Ren Group, a high-end-properties agency in New York that specializes in Chinese buyers. While the anti-immigrant rhetoric of the Trump era and pandemic travel restrictions discouraged foreign buyers in general (the NAR survey showed that the proportion of foreign buyers dipped by 31 percent last year).”
“Fearing that Chinese buyers will be missing for some time, some developers have changed tactics. Strategic Capital, an affiliate of a Chinese government corporation, along with American developers Cape Advisors and Forum Absolute, initially promoted Greenwich West, a 169-unit luxury condo in Greenwich Village, to Chinese buyers in 2018. But it has completely focused on selling to American residents ever since. This strategy paid off, with half of the building expected to be sold mainly to locals by the end of the summer (only ten units sold to Chinese buyers).”
“‘We are a Chinese company. We understand the Asian buying market,’ said Phillip Gesue, the chief development officer for Strategic Capital. ‘But at the end of the day, this project is really a Soho–Tribeca–West Village project.’ He doesn’t expect buyers from China to come back to the New York market anytime soon. ‘That’s over,’ Gesue said.”
The Standard Examiner in Utah. “Lenders accused by Summit Powder Mountain of defrauding the resort have alleged in turn that the Utah development is in clear project loan default and is taking unfair advantage of foreign investors. At issue is Summit Village, the planned centerpiece of a high-end resort expansion meant to attract corporate titans, big thinkers, entertainers and other A-list people.”
“Summit Mountain Holding Group, created by the founders of the Summit Series when they bought the former locally owned ski resort, began a $207 million project in 2016 to build Summit Village. The venue could include commercial, restaurant and retail spaces, some high-density housing such as condos or town houses, plus hotel and event space.”
“Summit on Aug. 4 sued two lender groups, Summit Village Development Lender 1 and Grand Canyon Development Holdings 3, in U.S. District Court in Salt Lake City, alleging they failed to deliver on a $120 million loan package and committed fraud in doing so. The suit came two weeks after the lenders filed a notice of loan default against Summit. In a response to the suit filed Aug. 26, the lenders said the $120 million loan matured on June 28, so they commenced ‘a non-judicial foreclosure of the mortgaged property to take over the unfinished project.’”
“The lender entities say they are made up of 81 Chinese nationals who, by contributing to U.S.-based projects under the federal EB-5 program, may acquire permanent green cards. An individual must invest $500,000 in a U.S. project that creates jobs. Investors are ‘in pursuit of the American dream’ and the attendant visa and they expect only nominal profits, the lawsuit response said.”
“The 81 investors ‘are seeking to leave the People’s Republic of China for a better life in America,’ and their investment helped create new jobs, the document said. Summit Powder Mountain, on the other hand, it said, ‘is a high-end property developer constructing a luxury ski resort for several hundreds of millions of dollars and seeking to populate it with some of the world’s celebrities, millionaires, and billionaires.’”
“The lenders say the requirements of the loan package are unambiguous and that Summit’s suit ‘is a desperate effort to avoid its absolute, unconditional, and irrevocable obligations.’ In the suit, Summit alleged the lenders raised the $120 million — aided by Summit’s securing an appearance at an investors’ event by basketball star Kobe Bryant — but spent most of the sum on other projects. ‘Because the borrower was relying on those funds to complete Summit Village, the borrower was never able to do so,’ the suit said.”