The horror story unfolding in China’s property developer stocks and shadow banking system is pure Lehman 100X whose contagion is now guaranteed to spread from the Dragon Empire on an intercontinental scale at the speed of light.
Mr. Hui, once the richest Chinese alive after Li Ka-shing, is now in jail as Evergrande becomes the most spectacular property developer to fail in world history. Evergrande has $350 billion in debt that is now toilet paper and its Hong Kong shares trade at 0.25 HKD, down 98% since they resumed trading in August. This will be the mother of all liquidations and condemns the world’s second largest economy, a $18 trillion colossus to the fate of Japan’s two lost decades and a deflation big chill last seen in the US in the 1930’s Great Depression, Japan in the 1990’s and Greece/Lebanon/Turkey/Pakistan/Egypt in the past decade.
The PRC is not going through a trade recession alone via Biden’s drop dead tech tariffs but a profound balance sheet cancer that will eviscerate its financial system on a quantum scale not remotely priced into Wall Street, credit risk spreads, wholesale interbank funding markets, emerging market export data and Shanghai/HK/Shenzhen equities. Do not be fooled by this morning’s 5% pop in the Hong Kong’s Red Chip index on news of pseudo Big Bang stimulus from Beijing. Lord Keynes spoke of a “liquidity trap” in his 1936 magnum opus and that is exactly what the growth engine of the global economy could well experience in the next two decades. I can easily envisage $20 Brent and $4000 LME Dr. Copper when the music stops.
As we learnt the hard way in 2009 and again in 2014 when real estate bubbles collapsed, the perma bullish opinions of bubble gum bankers/brokers are a kiss of death for leveraged lambs who must be fleeced before they are ultimately slaughtered. This will now happen in China and not all of Xi’s horses and all of Xi’s men can put together this $4.5 trillion property humpty dumpty together again. This much, at least, is certain.
Country Garden, with its $200 billion debt, just defaulted on its dollar bonds. Hong Kong CRE is in freefall. PLA tanks guard branches of Chinese shadow banks and regulators. At the height of the Tokyo real estate bubble, the Emperor’s Palace in Chiyoda was worth more than all the land in California and nine of the world’s top ten banks were Japanese with the 10th as Citicorp. In the first decade of the post-bubble deflation, all those nine mega banks went to money heaven to reside happily with the Sun Goddess, whose tear drops created the eight celestial islands of the Dai Nippon and Citi is as much a zombie bank in 2023 as it was in 1991. Marcus Tullius Cicero, what a great banker you would have been had you not lived and died in Rome 2000 years ago – not to know history is to forever remain a child and go belly-up in the markets. Investors with Chinese property developer bonds stuffed by Sing/HK Private Bankerjis in clients accounts know exactly what I mean.
Also published on Medium.
