China's leveraged economy begins to topple

 Epoch Times:

The potential bankruptcy of the Chinese real estate company Evergrande is much more than a “Chinese Lehman.” Lehman Brothers was much more diversified than Evergrande and better capitalized. In fact, the total assets of Evergrande outnumber the entire subprime bubble of the United States.

The problem with Evergrande is that it’s not an anecdote, but a symptom of a model based on leveraged growth and seeking to inflate GDP at any cost with ghost cities, unused infrastructure, and wild construction. The indebtedness chain model of Evergrande is not uncommon in China. Many Chinese companies follow the “running to stand still” strategy of piling on ever-increasing debt to compensate for poor cash flow generation and weak margins. Many promoters get into massive debt to build a promotion that either is not sold or is left with many unsold units, then they finance that debt by adding more credit for new projects using unsaleable or already leveraged assets as collateral.

The total liabilities of Evergrande account for more than double the official debt figure (more than 2 trillion yuan, or $300 billion). Evergrande’s financial hole is equivalent to almost a third of Russia’s GDP. Its annual revenues do not reach $80 billion, and it’s more than debatable whether those revenues are real since a relevant part comes from payment commitments of doubtful collection. Even if they were real, these revenues are not enough to address the bond maturities, which exceed $37 billion in the short term.

Evergrande is much more dangerous than it seems: All the “Keynesian” solutions that you’re hearing these days have already been implemented—massive liquidity injections, low interest rates, full implicit and explicit support from the Chinese regime …. Let’s not forget that Evergrande was the largest issuer of commercial paper in China, $32 billion issued in 2020, a 390 percent increase from 2015, according to Reuters.

Evergrande represents less than 4 percent of the overall Chinese market, but its model has been used by many Chinese promoters. The 10 biggest real estate developers account for 34 percent of the market and aggressive leverage practices are widespread.

The real estate sector is huge in China. Its direct and indirect weight, according to JP Morgan, is 25 percent of GDP, more than double the size of the real estate bubble in Japan or Spain. The sector has been growing with an indebted model at 15 percent per year in the last three years. The Chinese regime has introduced regulations to reduce the excess, but because it benefits from the increase in GDP and job creation, it has maintained a complacent position regarding the corporate debt model.

Chinese real estate companies, according to JP Morgan, have “reduced” their indebtedness to 92 percent of total assets from a monster 140 percent in 2018, with a profit margin of 9 to 13 percent. But those figures still show a larger and more concerning problem than headlines imply. Most Chinese real estate developers have total liabilities of 50 percent to total assets, according to JP Morgan. The problem is that the value of those assets and the capacity to sell them is more than questionable.
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This looks like a problem for the entire Chinese economy and those companies who have invested in it.  As market sectors like this come crashing down it could create a cascading effect on the economy as a whole also impact the Chicom defense sector which has relied on the market value of these properties for its own growth.  

I have posted on the ghost cities of China in the past.  There are entire cities with high-rise towers for residential and commercial uses that are empty.  That is an unsustainable situation for a highly leveraged company or economy.

Hunter Biden's 10 percent interest in a Chinese company could become worthless and they may be one of the reasons he has not unloaded it despite promises to do so.