bad policies such as zero covid, tech crackdown, or not resolving the root of real estate crisis -> investor (domestic and foreign) loss of confidence -> companies leaving or shut down -> rising unemployment or reduced salary -> debt bubble gets bigger -> bad policies.
This death spiral is enhanced by demographics collapse which is happening now, not 30 or 15 or 10 years ago, as well as nationalistic behaviors that isolates China. Not to mention global inflation and consumer demand collapse.
In my list of things I also didn't mention
* 20% unemployment rate for new grads
* layoffs from big tech companies
* 70% of China's economy is real estate related, which means China will take an even bigger impact from real estate collapse than other countries that have less % of economy in real estate.
* collapse in demand for real estate due to fast aging population
* 20% of built real estate stays empty (not even rented) due to investment vehicles purpose
The main issue with 2008 wasn't the housing bubble itself, such bubbles are normal and happen all the time. The issue was the extent of the financial over-leveraging (due to deregulation) by the financial firms which threatened the solvency of Main st and Wall st banks alike and the incentives that came out of the synthetic financial products that were engineered over baskets of mortgages. Namely a reduction in qualification for sub-prime loans and increased incentives to offer variable rate mortgages with cliff clauses + continual refinancing + speculation + flipping etc.
Essentially normal people losing their house == expected (though sad still) and would have caused a moderate recession (again, expected). However because of how overleveraged the banks themselves were they collapsed, this spread (contagion) to pension funds, equities, everywhere essentially and because these assets and positions in the funds and banks were held across the world it resulted in the -global- financial crisis rather than a contained RE bubble popping.
The US was able to 'rebalance' by propping up some banks - but in reality they saved 'consumers' by taking toxic loan assets of banks balance sheet and absorbing it onto the fed balance sheet.
CCP can't really do that for houses that are not built.
The other issue is the size of that part of the economy in relative terms.
This is is not going to 'blow over' - everything, including Xi's totalitarian takeover, increased control and repression, issue of age, diminishing marginal returns to growth ...
... this adds up to a 'major shift' in what China is. We saw a different China in the 1990s (quietly building), 2000's (onto the world stage), 2010 trying to be a global superpower, threatening Taiwan, occupying S. China Sea etc, and now 2020's 'reckoning /rebalancing'.
The most likely way this plays out is CCP slowly nationalizes Evergrande and other embattled developers (bond holders and equity investors 100% screwed), sell the unfinished projects to developers that didn't run themselves into the ground for them to be completed. This is already happening.
As much as people want to believe there will be collapse I just see it as incredibly unlikely given both track record and the iron grip that CCP has over the Chinese state banks. Without a failure in the banking sector I just don't see significant enough contagion to cause long-term damage.
This is not what happened. (The Fed never bought the toxic assets. It bought Treasuries and super-safe nontraditional assets off owners of toxic assets so they had the liquidity to resolve themselves. But the toxic stuff ended up in other places.)
Look at the giant bump in 2008 in Fed assets. Most of that is mortgages.
And then in 2019 an even bigger calamity.
Those massive jumps represent the finantialization of the USA, a massive form of economic shift.
[1] https://wallstreetonparade.com/2022/06/fed-data-shows-a-half...
There are zero mortgages on the Fed’s balance sheet. There has never been a mortgage on its balance sheet. If you think the Fed bought whole mortgages off banks for keepsies, or lost a single cent on its bailouts, you’ve missed something.
“Mortgage-backed obligations held by Federal Reserve Banks…guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae” [1]. Not mortgages. It’s a subtle difference. But a big one, given the top tranches of mortgage-backed securities never faced a solvency (versus a liquidity) problem.
Fed means Federal Reserve. Not the federal government. The Fed and federal government are meaningfully different.
It acts in essentially the same manner as 'Bank of England' or the 'ECB' just structured a bit differently.
The Fed's massive intervention in 2008 was similar to other Central Banks, because it's effectively the same thing i.e. 'governance'.
The Fed's intervention to 'buy mortgages' is not a 'market response' - it's a 'government response'.
The intervention was mostly related to buying mortgages (however they ares structured is secondary) and is de-facto a bailout of Home Owners, who, if they were subject to normal market conditions, would have faced massive foreclosures, and, would have destroyed home prices for everyone else, furthering the calamity.
That the mortgages on the Fed's Balance sheet were not 'the worst' of the assets is a bit of a side show - in 'current market terms' they were all toxic we know that because nobody wanted to buy them, which is why the Fed had to do a 'non market intervention'.
If they were not basically 'garbage' at the time, the Fed would not have had to intervene to buy them.
As a result, the Fed hold's a giant pile of 'mortgages'.
In the way Sudafed is meth. Agency MBS’s never faced solvency questions. Unrated mortgage-backed securities and whole mortgages did. You are argued the Fed bought toxic crap off banks. It didn’t. It bought the cream of the crop, giving banks liquidity with which to address the rest.
The difference between mortgages and agency MBSs is entry-level finance. You don’t need to know it. But you should understand your circles of competence well enough to know not to debate it.
Assuming there was political will, there's no reason the CCP couldn't do that for houses not yet built. By definition toxic debt is larger than whatever the collateral is.
Shadow banking and privatized loans are definitely a risk but they don't represent the same scale of risk as we saw in 2008. It's almost certain they explode but I don't think it's possible that such a small portion of the market can markedly affect the financial stability of the nation as a whole.
Aren’t those the banks that were taken over by gangs and has their funds embezzled? You’re painting way too rosy a picture of the Chinese financial system. It’s taken months to make rural depositors while after having their money stolen. They’re still waiting.
Because of their horrendous credit ratings developers actually had a huge amount of trouble sourcing capital locally and were forced to sell junk bonds on the international market at elevated yields. This means a few things, firstly that everyone acknowledged the risks (hence the high yield) but also that the impact of the RE market slowdown is devastating on these over-leveraged developers because of their very high cost of debt.
The fact that the assets were always junk rated is partially why this is way less of a big problem than people are trying to make it out to be. In 2008 the problem was the assets were AAA rated (the exact opposite of junk) and thus were held in enormous quantities by large banks and funds all around the world. Conversely because of the risk these assets posed they are held rather narrowly in comparison and those that do hold them knew and were sophisticated enough to accept the risks.
US (and Western Europe) loans backed by residential real estate were considered "safe" by the world. Loans in China that outside parties need to work backchannels to be allowed to get into will never be considered that safe.
I will believe it when I see it.
The RE bubble is bad but substantially less bad than what the US was facing in 2008. There is a big difference between over-leveraged developers (the Chinese problem) and rotten Main street banks (which was the US problem).
In China's case we are likely going to see a continued drop in housing prices for a little bit longer until they plateau. However they are unlikely to see growth again for a long time unless Chinese government changes tact. This isn't a bad thing as right now Chinese homes are some of the most unaffordable on the planet, especially in desirable cities. Also it will lead to speculation and investment moving outside of RE and into other vehicles like equities which will improve the breadth and quality of Chinese financial markets. The other bad things that will happen is construction companies will likely be in distress, large infrastructure projects/spending directed by the CCP will save the good ones but there will be a bunch of consolidation and downsizing. Not a particularly bad thing given the changing population dynamics probably requiring the construction of less housing than previously. Impact is unlikely to spread beyond RE because of how compartmentalized funding is in China. The government controls all the major banks and as a result they run under very low-risk capital regimes. It's much more likely the big financial fallout will be from foreign investors that were greedily holding onto risky Chinese commercial paper.
All-in-all I actually suspect this to go out with a whimper rather than a bang. The way systems are setup in China there just isn't really the potential for a bang outside of like big social issues causing a revolution or something but generally speaking that doesn't happen. Usually as dissent grows they recognize it won't go away and start doing something to appease the people. Recent example being their effort to deal with pollution in the major cities, etc.
So yeah. I get that Western folks, Americans in particular don't understand the Chinese system and wish ill will upon it but the reality is that it's a lot more robust than said folks give it credit so don't bet on it failing anytime soon.