China’s recession deepens – MacroBusiness

The news from Evergrande is dense and fast. A sort of selective bailout and bail-in is going on depending on whether you are Chinese or not. Sincocism:

China Evergrande misses another bond payment – Nikkei Asia

Evergrande, the world’s most indebted developer, has little cash left and has also missed payments to vendors, banks and retail debtors. It was due to pay $ 46 million in interest to holders of an offshore bond on Wednesday at 11:59 p.m. New York time, but two investors on Thursday said they had not received any payment or notice from the company.

“This is a repeat of what happened last week,” said one investor who also did not receive a payment due on September 23. “All we have is silence.

Banks urged to protect homebuyers amid developer debt crises – Caixin

“There is a dilemma in regulating real estate finance,” said a banker specializing in corporate banking. “On the one hand, regulators cannot bring down real estate companies on a large scale or increase their risk of default, because it concerns the economy and the issue of housing for citizens. It is likely that regulators at the meeting (Wednesday) asked banks not to require real estate developers to repay loans before due dates. But on the other hand, if regulators relax credit restrictions too much, house prices will rise again and people will not be happy.

Caixin – 保 交 楼 或 成 政策 重点 _ 金融 频道 _ 财 新网

“Financial regulation is mentioned again to protect the rights and legitimate interests of housing consumers; ensuring the delivery of buildings can become the focal point of the policy

“两 维护” 并非 急转弯 _ 中国 经济 网 国家 经济 门户

Recent policies to “safeguard the healthy development of the real estate market and the legal interests of owners” do not signal a “turnaround,” reads a commentary in the Economic Daily.

The Chinese recession is accelerating. Via Goldman:

China’s economic growth has slowed this year – first gradually, then more suddenly. Our current activity indicator in China averaged 10% in H2 2020, a little below 6% in H1 2021, but slipped in July and fell into negative territory in August (Figure 1 ). A significant portion of the August weakness reflects temporary factors related to the recent Covid outbreak: the GS China EffectiveLockdown Index, our proprietary Covid restrictions metric, rose to 22 in August, but fell back to 8 in September at to date (0 = no restrictions), and the services PMI rebounded strongly to 52.4 in September (from 45.2 in August). But industrial activity in China is expected to weaken further in September, judging by sharp declines in production in some energy-intensive sectors in recent weeks and a notable drop in the official PMI manufacturing index.

The recession is led by real estate. The spreads remain frozen for the developers but the contagion is at least so far contained:

The leading indicator for land sales is still in free fall:

Sales picked up a bit, perhaps helped by struggling volumes. But seasonally adjusted from Golden Week, they got worse:

There is still no compensation from infrastructure funding:

And the combined effect of the collapse of real estate development, weak infrastructure and industry rationing of electricity caused steel production to plummet:

Down 21% year on year. Down 24% from the June peak. These falls are epic, in the order of 250 to 300 mt of iron ore less needed in annualized terms in September.

There is no end in sight:

  • Yes, China is moving slowly to support the economy around the Evergrande black hole. The bailout / bail-in is underway.
  • The PBoC tells banks to keep lending to developers to keep the contagion from spiraling out of control and it injects liquidity. But these measures did not restore developer spreads in bond markets, so funding pressures remain acute.
  • Land prices must be in free fall and house prices are also likely to reverse.
  • Infrastructure is down sharply from one year to the next, contrary to expectations.
  • All of this is compounded by production cuts linked to energy shocks.

China is fighting desperately not to have to cut the RRR and policy rates, realizing that in doing so it will unleash its impossible trinity and crush the CNY, which will send global weakness via contagion to emerging markets.

But that seems inevitable unless China reverses the real driving force behind it all – the three red line policy – which it is loath to do. If so, he will have no choice but to pull the currency tear string.

Goldman sums it up pretty well:

… We see lingering uncertainties surrounding the Chinese real estate sector potentially having broader macroeconomic implications. Our Chinese economic team sees three reasons why it is important for the government to communicate clearly on the plan to contain any Evergrande-related ripple effects on the wider real estate sector. First, unlike the consumption of non-durable goods, confidence plays an important role in the decision of households to buy a home. When the ability of developers to deliver apartments is called into question, pre-sales of properties can drop. Second, housing markets tend to show strong momentum. Once expectations for future price movements are set, it takes months, if not years, to reverse.

Third, with local Covid epidemics resurfacing from time to time, the consumer and service industries are unlikely to rebound strongly. In this context, a sharp deceleration in the real estate market could exacerbate and amplify the downward pressure on economic growth and the labor market. In order to limit the impact of the contagion on the Chinese real estate sector, we believe that the main concern of decision-makers is to ensure that Evergrande’s onshore real estate operations can be kept in operation. Possible options include using third parties to invest in the business and stabilize operations, as there have been examples of similar events in the past. While there is little clarity on when a potential resolution of Evergrande’s debt problems can be achieved, and considerable uncertainty remains about what the solution would look like, we maintain the view that Chinese policymakers have zero tolerance on emerging systemic risk. This suggests that a short-term solution to stabilize Evergrande’s onshore real estate operations would be needed.

Beyond the short term, much will depend on the direction of government policy towards the real estate sector. In this regard, our real estate team in China believes that the government is unlikely to reverse debt relief efforts in the industry. We see the opportunity for policymakers to relax the implementation of debt relief efforts (for example, the three red lines policy was introduced with a 3 year implementation period) to help prevent a systemic impact. larger if signs of contagion appear. But without deviation from policymakers’ credit cleaning stance, it suggests tail risk in Chinese HY real estate will be prolonged. So even if we keep our positive view on Asia HY overIG, we would avoid the riskiest credit among Chinese HY and BB rated real estate developers.

Avoid China, period.

Finally, this is a tip that glue-sniffing traders should follow. Why they rushed into the iron complex yesterday, on the eve of the Golden Week holiday when anything could happen, is guessable:

The Chinese steel PMI index showed a slight improvement in the second derivative yesterday, but nonetheless finds itself in an ongoing deep recession. I suspect the elevator is seasonal as the rains have passed, but it’s still bad:

There is still no reason to be anything other than very short iron ore.

Houses and holes
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