Sup y’all, time for another Jugger post about China cause this stuff keeps getting crazier. It is well joked about here that a million China collapses have been predicted and never come to fruition. Well, my good friends, what if I told you that the CCP and Chinese firms have been able to easily circumvent any crash with two easy Ls that may not be present anymore:
Lies and Liquidity
In 1997, following the Asian Financial Crisis, the Chinese government created four nationally owned asset management companies (AMCs), namely China Huarong AMC, China Cinda AMC, China Great Wall AMC and China Orient AMC, to focus on managing distressed debt accumulated in state-owned banks. These entities were each attached to one of the “Big-4” Chinese banks and were initially, in theory, mandated to acquire and rehabilitate non-performing loans in the Chinese financial system leaving their affiliated banks to focus on their core deposit-taking and lending role. Essentially, these entities are the garbage disposal of China’s financial system. In practice, they have expanded far beyond their initial mandate and engaged in the exact sort of risky lending that they were created to clean up. This “bad bank” model has been seen successfully applied across the world, most notably Bernake took a play out of this book during the financial crisis to maintain liquidity.
Translation: These companies would literally eat all the shit from retarded risk-taking and say “boy that was some good chocolate, carry on”. In essence, all casualties from the Chinese economy could be absorbed and lied about until everything blew over.
Earlier in the year, Huarong made a surprise announcement that halted its stock trading and sent its debt spiraling. It was unable to produce audited financial statements for 2020 by its April deadline, signifying deep trouble with the company’s financial reporting and viability. Aka a Lehman moment. Eventually, Beijing stepped in with an 8 billion dollar bailout that partially calmed things down, but provided a template for what would happen if a systemically important, state-controlled financial entity found itself up shit creek. Traders would panic, the value of the debt would plummet, and fear would spread to other firms, aka contagion.
Well, with the Huarong crisis solved via liquidity and money printing everything was going well in SHHHina.
Then the property market imploded.
Evergrande began to fail however was not gifted a bailout like Huarong. A deep chill was put over the property sector with sales and financing drying up. The banks we just spoke about had deep exposure to the property sector while already on shaky footing. Evergrande sparked a contagion that led to the widespread and indiscriminate failure of both “good” and “bad” property developers, leaving behind a mountain of bad debts and unfulfilled obligations.
These developers have been insolvent for years, they just lied about it because they maintained liquidity through financing. Well, that show is over.
The bank runs and tanks protecting rural banks that I have written about previously are already insolvent. Of course, none will admit this reality because the CCP will lie through their teeth to save face. In recent weeks, owners of unfinished apartment projects have begun to organize mortgage boycotts that have quickly spread to over 300 projects in 90 cities and are estimated to involve mortgages worth 2 trillion yuan. This year, a second state-run asset management company, China Great Wall Asset Management, failed to produce an audit as well. We have seen rural banks start to go under, but if/when a state-controlled bank or AMC goes tits up all hell will break loose.
Make no mistake about it, China is going through a MASSIVE credit crunch as I write this and the prognosis looks very grim without a hail mary and they cannot lie about it forever.
It is awfully convenient that China is trying to start a conflict just as a supernova is going off in their economy. An idiot might surmise that they are trying to deflect from domestic problems in the hopes it helps the current situation.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.
-40% YoY property sales in China for July – PBOC implements property policies pic.twitter.com/Bx0j7E3qi3
— 🅰🅻🅴🆂🆂🅸🅾 (@AlessioUrban) August 2, 2022