1 00:00:10,800 --> 00:00:14,280 Speaker 1: Hello, and welcome to another episode of the All Thoughts podcast. 2 00:00:14,360 --> 00:00:19,000 Speaker 1: I'm Tracy Alloway and I'm Joe. So Joe, it feels 3 00:00:19,120 --> 00:00:23,959 Speaker 1: like it's another day, another default by a Chinese property developer, 4 00:00:24,400 --> 00:00:27,040 Speaker 1: and so just today, I should say we're recording this. 5 00:00:27,200 --> 00:00:32,000 Speaker 1: On January, we saw a company called Oian I'm probably 6 00:00:32,200 --> 00:00:35,440 Speaker 1: not pronouncing that right, saying that it won't make payments 7 00:00:35,600 --> 00:00:39,600 Speaker 1: on four bonds that I think add up to almost 8 00:00:39,680 --> 00:00:44,360 Speaker 1: seven hundred million dollars. But here's the weird thing. For 9 00:00:44,479 --> 00:00:48,239 Speaker 1: a brief moment this week, it seemed like people investors 10 00:00:48,400 --> 00:00:52,200 Speaker 1: were getting more optimistic about the Chinese real estate space. 11 00:00:52,440 --> 00:00:55,760 Speaker 1: We actually saw a pretty dramatic rally in dollar bonds 12 00:00:55,880 --> 00:01:00,000 Speaker 1: from junk rated property developers because there were some reports 13 00:01:00,040 --> 00:01:03,280 Speaker 1: that China would make it easier for property companies to 14 00:01:03,320 --> 00:01:06,640 Speaker 1: get cash from pre sales of developments. And then of 15 00:01:06,680 --> 00:01:10,800 Speaker 1: course we saw China lower its interest rates earlier this week, 16 00:01:10,920 --> 00:01:14,280 Speaker 1: which you know, obviously monetary easing is going to be 17 00:01:14,360 --> 00:01:17,279 Speaker 1: good for housing. So there seemed to be these really 18 00:01:17,480 --> 00:01:21,720 Speaker 1: opposite push pull factors at the moment, and no one 19 00:01:21,760 --> 00:01:24,840 Speaker 1: seems to know quite what is going on in the space. 20 00:01:25,760 --> 00:01:28,080 Speaker 1: I have to say, I kind of missed, you know, 21 00:01:28,319 --> 00:01:30,360 Speaker 1: in all the my scanning of the news, I actually 22 00:01:30,400 --> 00:01:33,600 Speaker 1: kind of missed the optimism period you were talking about 23 00:01:33,840 --> 00:01:37,440 Speaker 1: because every time, I mean it was only a day. Okay, 24 00:01:37,520 --> 00:01:40,280 Speaker 1: we're back to pessimism already, because I have to say, 25 00:01:40,360 --> 00:01:43,720 Speaker 1: like every time I read like you know, obviously look 26 00:01:43,760 --> 00:01:45,920 Speaker 1: at uh sort of like Q four of last year, 27 00:01:45,959 --> 00:01:48,760 Speaker 1: we're talking a lot about ever Ground and the trouble 28 00:01:48,840 --> 00:01:52,160 Speaker 1: they were getting into, and it feels like since then 29 00:01:52,320 --> 00:01:56,520 Speaker 1: things have metaestasized, more developers getting into trouble, more fears 30 00:01:56,520 --> 00:02:00,800 Speaker 1: of default, maybe companies that were perceived as a safer 31 00:02:00,840 --> 00:02:04,360 Speaker 1: credit risks than ever Grand was getting into trouble. So 32 00:02:04,400 --> 00:02:06,320 Speaker 1: it really feels that the big story, or at least 33 00:02:06,320 --> 00:02:08,480 Speaker 1: every time I look into it, it's like this situation 34 00:02:08,560 --> 00:02:11,760 Speaker 1: is getting worse. Yeah, So we haven't really seen an 35 00:02:11,800 --> 00:02:15,600 Speaker 1: extreme financial crisis like a Lehman moment that some people 36 00:02:15,639 --> 00:02:18,640 Speaker 1: were talking about, you know, late last year. But we 37 00:02:18,760 --> 00:02:22,320 Speaker 1: have seen contagion in the sense that we have seen 38 00:02:22,400 --> 00:02:25,960 Speaker 1: spreads on other junk rated dollar bonds go up quite 39 00:02:25,960 --> 00:02:29,280 Speaker 1: a bit. But really, I think the question no one 40 00:02:29,400 --> 00:02:33,079 Speaker 1: quite knows yet is what exactly is the end game here? 41 00:02:33,240 --> 00:02:37,160 Speaker 1: Like what exactly is China trying to achieve. Are they 42 00:02:37,200 --> 00:02:40,760 Speaker 1: going to provide policy support for property developers or are 43 00:02:40,800 --> 00:02:44,440 Speaker 1: they going to reform the market and let the weaker 44 00:02:44,600 --> 00:02:48,400 Speaker 1: players fail. So today I'm very pleased to say that 45 00:02:48,440 --> 00:02:50,560 Speaker 1: we have the perfect person to come on and give 46 00:02:50,639 --> 00:02:53,320 Speaker 1: us an update on what's really going on in Chinese 47 00:02:53,320 --> 00:02:56,160 Speaker 1: real estate. We're going to be speaking with Travis Lundie. 48 00:02:56,440 --> 00:03:00,799 Speaker 1: He's an independent analyst who publishes on the smart Karmat platform, 49 00:03:00,840 --> 00:03:03,080 Speaker 1: and of course we had him on the show last 50 00:03:03,160 --> 00:03:07,120 Speaker 1: year to talk about China Evergrand, which has since then 51 00:03:07,280 --> 00:03:11,280 Speaker 1: finally and officially defaulted on its debt. So, Travis, thank 52 00:03:11,280 --> 00:03:13,839 Speaker 1: you so much for coming back on the show. Thank 53 00:03:13,880 --> 00:03:16,240 Speaker 1: you for having me. I'm trying to think where to 54 00:03:16,320 --> 00:03:19,320 Speaker 1: begin because there has been so much going on in 55 00:03:19,360 --> 00:03:21,960 Speaker 1: the space, But maybe just to start, you can give 56 00:03:22,040 --> 00:03:25,959 Speaker 1: us an update on I guess, the current situation around 57 00:03:26,120 --> 00:03:29,560 Speaker 1: Chinese property developers. What have we seen since we last 58 00:03:29,560 --> 00:03:34,640 Speaker 1: spoke to you and since Evergrand actually defaulted. Okay, if 59 00:03:34,680 --> 00:03:37,240 Speaker 1: we take it back a little bit further back to 60 00:03:37,280 --> 00:03:39,520 Speaker 1: when we last spoke, and I can I think we 61 00:03:39,560 --> 00:03:43,360 Speaker 1: can use ever Grand as a kind of case study 62 00:03:43,400 --> 00:03:46,960 Speaker 1: for the way other developers have also seen deterioration, and 63 00:03:47,000 --> 00:03:50,760 Speaker 1: because ever Grand is so large, it effectively encompasses the 64 00:03:50,840 --> 00:03:54,120 Speaker 1: size of several other smaller developers who might default. The 65 00:03:54,200 --> 00:03:57,640 Speaker 1: loan interest payments were not made on domestic bank loans. 66 00:03:57,640 --> 00:04:01,440 Speaker 1: It appears trust loan repayments were not made. Wealth management 67 00:04:01,440 --> 00:04:05,480 Speaker 1: products have not been repaid at their maturity. At some 68 00:04:05,520 --> 00:04:08,920 Speaker 1: point in late Q three to early q four, something 69 00:04:08,960 --> 00:04:11,520 Speaker 1: like half of the projects that ever Grand was working 70 00:04:11,520 --> 00:04:14,680 Speaker 1: on had been at sea work suspended. At that point, 71 00:04:14,720 --> 00:04:19,560 Speaker 1: we've seen a certain amount of positioning. People are positioning 72 00:04:19,560 --> 00:04:22,800 Speaker 1: for the fall. Local governments started looking at taking back land. 73 00:04:23,400 --> 00:04:27,520 Speaker 1: Ever Grant was trying to reduce its its debt by 74 00:04:27,720 --> 00:04:33,520 Speaker 1: delivering assets, selling assets to other developers, selling assets to 75 00:04:33,640 --> 00:04:40,160 Speaker 1: local government affiliated s o ees. Basically none of that worked. Eventually, 76 00:04:40,480 --> 00:04:43,360 Speaker 1: ever Grand ran into problems paying its coupons on its 77 00:04:43,400 --> 00:04:46,159 Speaker 1: offshore debt, paid a bunch of them late. It got 78 00:04:46,160 --> 00:04:49,280 Speaker 1: an extension on a guarantee on a private debt which 79 00:04:49,360 --> 00:04:53,159 Speaker 1: people did not know existed. That extension required delivery of 80 00:04:53,160 --> 00:04:57,400 Speaker 1: certain documentation from a municipal government. That documentation didn't derive. 81 00:04:58,120 --> 00:05:01,360 Speaker 1: The bond holders demanded repayment. That came with the great 82 00:05:01,440 --> 00:05:03,400 Speaker 1: end of a grace period of another coupon, and you know, 83 00:05:03,520 --> 00:05:05,680 Speaker 1: Evergrhanad just tossed in the towel and said, you know, 84 00:05:05,680 --> 00:05:08,440 Speaker 1: we're not paying. That triggered an event of default on 85 00:05:08,480 --> 00:05:11,640 Speaker 1: the on the offshore notes, all of them. Uh. And 86 00:05:11,800 --> 00:05:13,960 Speaker 1: since that time it hasn't made any sense to pay 87 00:05:14,000 --> 00:05:17,279 Speaker 1: any of the other coupons or redemptions on the offshore notes. 88 00:05:17,480 --> 00:05:20,480 Speaker 1: And so you know, people are looking at these and saying, woo, 89 00:05:20,560 --> 00:05:23,039 Speaker 1: they didn't pay that coupon, or maybe they're not going 90 00:05:23,080 --> 00:05:24,880 Speaker 1: to pay that redemption at the end of this month. 91 00:05:25,160 --> 00:05:27,279 Speaker 1: Well they're not going to. They can't simply decide to 92 00:05:27,279 --> 00:05:29,760 Speaker 1: start repaying these things without paying back the other ones. 93 00:05:30,720 --> 00:05:34,440 Speaker 1: In the meantime, the onshore bonds are seeing pressure. There 94 00:05:34,520 --> 00:05:38,840 Speaker 1: was an effort to extend the repayment on some onshore 95 00:05:38,880 --> 00:05:42,320 Speaker 1: bonds last week that was successful, but it's not sure 96 00:05:42,360 --> 00:05:46,560 Speaker 1: how much of that was effectively prodded by local authorities. 97 00:05:46,600 --> 00:05:50,320 Speaker 1: You either extend or you get nothing. When the Jumble 98 00:05:50,400 --> 00:05:53,680 Speaker 1: Fortune redemption missed, that triggered you know, considerable upset in 99 00:05:53,720 --> 00:05:57,520 Speaker 1: local circles, and a working group was dispatched and they 100 00:05:57,520 --> 00:06:00,360 Speaker 1: set up a new risk management committee. That work group 101 00:06:00,400 --> 00:06:02,599 Speaker 1: is very similar to the way H and A group 102 00:06:02,680 --> 00:06:08,040 Speaker 1: was resolved in February two after years of debt issues 103 00:06:08,120 --> 00:06:11,839 Speaker 1: and over investment which had gone sour and some you know, 104 00:06:11,920 --> 00:06:15,719 Speaker 1: likelihood of missed payments in Q one two, the high 105 00:06:15,720 --> 00:06:17,919 Speaker 1: non government sent in a working group. And this is 106 00:06:18,000 --> 00:06:20,320 Speaker 1: you know H and A says, we will request you 107 00:06:20,400 --> 00:06:22,679 Speaker 1: to send in the working group, and that's the official story. 108 00:06:22,720 --> 00:06:25,400 Speaker 1: What really happens is, you know, the local government says, 109 00:06:25,839 --> 00:06:27,800 Speaker 1: we would like you to request us to send in 110 00:06:27,800 --> 00:06:30,440 Speaker 1: a working group, and they say yes, sir, So they 111 00:06:30,440 --> 00:06:33,279 Speaker 1: send in a working group, and that working group chairman 112 00:06:33,279 --> 00:06:35,480 Speaker 1: became the new chairman of the company. And the goal 113 00:06:35,640 --> 00:06:38,960 Speaker 1: was quote to diffuse risks and safeguard the interests of 114 00:06:38,960 --> 00:06:41,960 Speaker 1: all parties. And so that's the risk management part. And 115 00:06:42,040 --> 00:06:44,040 Speaker 1: given that the local government in every grand's case has 116 00:06:44,080 --> 00:06:47,279 Speaker 1: been tasked with sorting out all of the claims, financial 117 00:06:47,360 --> 00:06:51,680 Speaker 1: and otherwise, its involvement is key to safeguard the interests 118 00:06:51,720 --> 00:06:54,200 Speaker 1: of all the parties. And so if we look at 119 00:06:54,200 --> 00:06:56,400 Speaker 1: the H n A process, we can look and we 120 00:06:56,440 --> 00:06:59,240 Speaker 1: can see that there's a possibility that EVERGRAND turns out 121 00:06:59,320 --> 00:07:02,560 Speaker 1: roughly the same way. H and A basically went into 122 00:07:02,560 --> 00:07:06,440 Speaker 1: a kind of suspended animation. Bond holders didn't know what 123 00:07:06,480 --> 00:07:10,600 Speaker 1: was going on. Non strategic assets which could be sold 124 00:07:10,880 --> 00:07:13,960 Speaker 1: were sold to non local parties that raised a little 125 00:07:13,960 --> 00:07:17,680 Speaker 1: bit of cash. The local operating businesses continued running and 126 00:07:17,840 --> 00:07:21,000 Speaker 1: you know, at a negative earnings rate. The working groups 127 00:07:21,040 --> 00:07:23,640 Speaker 1: spent basically a year figuring out where all the bodies 128 00:07:23,640 --> 00:07:26,920 Speaker 1: were buried and what needed to be done. And in 129 00:07:27,000 --> 00:07:31,040 Speaker 1: February two thousand twenty one, the company filed for bankruptcy. 130 00:07:31,440 --> 00:07:34,000 Speaker 1: That got the court officially involved in the working group. 131 00:07:34,040 --> 00:07:36,720 Speaker 1: Managed company could then solicit sponsors to take over the 132 00:07:36,760 --> 00:07:40,520 Speaker 1: businesses and the assets, and they took all three hundred 133 00:07:41,200 --> 00:07:44,000 Speaker 1: assets and and companies bunched them into a group of 134 00:07:44,040 --> 00:07:47,240 Speaker 1: four and then said please bid. And it was the 135 00:07:47,320 --> 00:07:52,320 Speaker 1: bids which were presented which proposed breakdowns of how much 136 00:07:52,400 --> 00:07:56,880 Speaker 1: each of the creditor classes got. And that meant that 137 00:07:56,960 --> 00:08:00,400 Speaker 1: you know, people who were who didn't have money, they 138 00:08:00,400 --> 00:08:03,119 Speaker 1: were waiting to get repaid. It took them a long 139 00:08:03,200 --> 00:08:05,760 Speaker 1: time to get repaid. And I think that ever Grand 140 00:08:05,840 --> 00:08:08,320 Speaker 1: is going to be in much the same situation. Instead 141 00:08:08,320 --> 00:08:11,040 Speaker 1: of three units, it has you know, a thousand units. 142 00:08:11,760 --> 00:08:14,520 Speaker 1: Right now, everyone is quote unquote cooperating U and the 143 00:08:14,560 --> 00:08:17,040 Speaker 1: highest goal here is to just keep on working, building, 144 00:08:17,120 --> 00:08:19,600 Speaker 1: finishing projects and delivering them. The home buyers, you know, 145 00:08:19,640 --> 00:08:23,640 Speaker 1: homebuyers and local governments are the protected classes here. Importantly, 146 00:08:23,680 --> 00:08:26,560 Speaker 1: they're also the way that cash eventually gets back to 147 00:08:26,600 --> 00:08:30,840 Speaker 1: the Onshore Real Estate parent company. So without these projects continuing, 148 00:08:31,200 --> 00:08:35,200 Speaker 1: there's no resolution on the other end. That progress rate 149 00:08:35,240 --> 00:08:38,040 Speaker 1: is now up into the nineties, and there will be 150 00:08:38,160 --> 00:08:40,600 Speaker 1: positive news because every grand will say, you know, we're 151 00:08:40,600 --> 00:08:43,480 Speaker 1: doing this, we're doing that, and the negative news simply 152 00:08:43,480 --> 00:08:48,600 Speaker 1: doesn't come out. So Tracy said something interesting in the beginning, 153 00:08:48,760 --> 00:08:50,600 Speaker 1: and it's something to the extent of like, well, what 154 00:08:50,760 --> 00:08:54,320 Speaker 1: is the Chinese government attempting to achieve here? What is 155 00:08:54,360 --> 00:08:57,840 Speaker 1: the endgame? Which to me raising the question of like, okay, 156 00:08:57,840 --> 00:09:00,000 Speaker 1: how much of what we've seen over the last several 157 00:09:00,120 --> 00:09:04,000 Speaker 1: months is the result of some policy aim versus some 158 00:09:04,080 --> 00:09:08,080 Speaker 1: sort of unintended consequence of something that was not the 159 00:09:08,200 --> 00:09:12,080 Speaker 1: aim at all. And so when you look at what's transpired, 160 00:09:12,240 --> 00:09:15,360 Speaker 1: and you know, as we haven't had anything like Lehman, 161 00:09:15,440 --> 00:09:17,880 Speaker 1: but it's certainly been messy. There's certainly been a lot 162 00:09:17,920 --> 00:09:21,559 Speaker 1: of pressure on the protected groups of homebuyers and local governments. 163 00:09:21,880 --> 00:09:24,520 Speaker 1: How much was this a goal versus how much was 164 00:09:24,600 --> 00:09:28,320 Speaker 1: this a unfortunate side effect of aiming to achieve something else. 165 00:09:29,360 --> 00:09:33,160 Speaker 1: That's a really good question. I'm not sure I have 166 00:09:33,200 --> 00:09:35,640 Speaker 1: a good answer for that one, and if I did, 167 00:09:35,679 --> 00:09:38,000 Speaker 1: I'm not sure I could say it. It's pretty clear 168 00:09:38,320 --> 00:09:41,720 Speaker 1: this was not a policy or a group of policies 169 00:09:41,760 --> 00:09:45,840 Speaker 1: which happened out of the blue. The p POC started 170 00:09:45,840 --> 00:09:51,240 Speaker 1: cracking down on excessive debt at financialized developers, which included 171 00:09:51,240 --> 00:09:54,800 Speaker 1: every grand at that time, in two thousand eighteen, they 172 00:09:54,840 --> 00:09:56,720 Speaker 1: warned them. At the beginning of two thousand eighteen, they 173 00:09:56,800 --> 00:09:58,240 Speaker 1: labeled them in a report. At the end of two 174 00:09:58,240 --> 00:10:02,000 Speaker 1: thousand eighteen, the Chairman Hua went on the tape saying 175 00:10:02,000 --> 00:10:04,240 Speaker 1: we will reduce debt. He went on the tape again 176 00:10:04,800 --> 00:10:07,280 Speaker 1: in early two thousand twenties saying he would reduce debt 177 00:10:07,360 --> 00:10:10,240 Speaker 1: drastically in the next three years. This was a plan, 178 00:10:10,760 --> 00:10:13,559 Speaker 1: and it only came to the August two thousand twenty 179 00:10:13,600 --> 00:10:18,000 Speaker 1: when the p POC, the Housing and Urban Development Ministry 180 00:10:18,320 --> 00:10:21,400 Speaker 1: came out and said you twelve, we need you to 181 00:10:21,720 --> 00:10:24,000 Speaker 1: abide by these new rules. These are the three red lines. 182 00:10:24,600 --> 00:10:26,559 Speaker 1: And it never became official policy as far as I 183 00:10:26,559 --> 00:10:28,720 Speaker 1: can tell, but everyone knows what they are. And it 184 00:10:28,800 --> 00:10:32,880 Speaker 1: meant that, you know, those who were triggering two to 185 00:10:33,000 --> 00:10:35,400 Speaker 1: three of those red lines, and ever grand triggered all three, 186 00:10:35,880 --> 00:10:40,280 Speaker 1: there was simply nothing to do other than shrink. If 187 00:10:40,320 --> 00:10:44,280 Speaker 1: you're running a business and you're growing top line and 188 00:10:45,200 --> 00:10:47,960 Speaker 1: you have a hundred and you're financing at ten, that 189 00:10:48,040 --> 00:10:50,840 Speaker 1: means in order to roll your financing next year, you 190 00:10:50,880 --> 00:10:53,600 Speaker 1: need to roll a hundred and ten. Well, if you've 191 00:10:53,640 --> 00:10:57,560 Speaker 1: got new new assets and new obligations because you bought 192 00:10:57,640 --> 00:11:00,760 Speaker 1: some land bank last year and you've got an increased 193 00:11:00,800 --> 00:11:03,800 Speaker 1: number of projects this year, well, you know, to start 194 00:11:03,800 --> 00:11:06,079 Speaker 1: a project, you pay off the government with the local 195 00:11:06,120 --> 00:11:09,120 Speaker 1: government with your payment for the land. You have to 196 00:11:09,160 --> 00:11:11,319 Speaker 1: go get debt to do that. So you go get 197 00:11:11,360 --> 00:11:14,280 Speaker 1: some debt, you pay the land, you start pre selling, 198 00:11:14,360 --> 00:11:16,080 Speaker 1: You get some cash in the door. Some of that 199 00:11:16,160 --> 00:11:19,040 Speaker 1: has to stay in escrow, but that debt to pay 200 00:11:19,080 --> 00:11:21,200 Speaker 1: off the land at the start of a building is 201 00:11:21,520 --> 00:11:23,600 Speaker 1: a kind of a bridge. You have to increase the 202 00:11:23,760 --> 00:11:27,240 Speaker 1: capacity for that bridge. If you can't have any ability 203 00:11:27,240 --> 00:11:31,640 Speaker 1: to increase interest bearing debt, then you have to sell stuff. 204 00:11:32,200 --> 00:11:34,400 Speaker 1: It's not as much as you know buying land bank, 205 00:11:34,559 --> 00:11:38,680 Speaker 1: you actually have to sell stuff. And I think that 206 00:11:38,800 --> 00:11:40,560 Speaker 1: the problem is that if you do that for the 207 00:11:40,600 --> 00:11:44,400 Speaker 1: twelve largest developers, well that's going to trickle down. It's 208 00:11:44,440 --> 00:11:47,440 Speaker 1: going to hurt everybody. This was not something which was 209 00:11:48,200 --> 00:11:53,120 Speaker 1: an accident. There was a real design to reduce over 210 00:11:53,240 --> 00:11:57,600 Speaker 1: leverage at developers. There has been efforts to reduce upward 211 00:11:57,640 --> 00:12:00,400 Speaker 1: price pressure in a bunch of markets. There have been 212 00:12:00,440 --> 00:12:04,960 Speaker 1: efforts to reduce excessive lending against property. They've put pressure 213 00:12:04,960 --> 00:12:07,160 Speaker 1: on the banks for years to keep the cap at 214 00:12:07,160 --> 00:12:10,959 Speaker 1: the allocated level or below. They get really nasty when 215 00:12:10,960 --> 00:12:14,079 Speaker 1: a bank goes anywhere near that level. So they've been 216 00:12:14,120 --> 00:12:17,720 Speaker 1: reducing the leverage available in all of the domains until 217 00:12:17,760 --> 00:12:19,800 Speaker 1: they got to developers. Then they finally pushed it on 218 00:12:19,840 --> 00:12:24,320 Speaker 1: developers too. This was not a coincidence. Now, you know, 219 00:12:24,360 --> 00:12:27,319 Speaker 1: the common prosperity theme became very popular in two thousand 220 00:12:27,400 --> 00:12:29,559 Speaker 1: twenty one. It existed before that. I think most of 221 00:12:29,600 --> 00:12:32,320 Speaker 1: us didn't pay quite enough attention to it. But the 222 00:12:32,360 --> 00:12:34,720 Speaker 1: houses are for living in, not for speculation. That was 223 00:12:34,760 --> 00:12:36,520 Speaker 1: around for even more and we you know, we didn't 224 00:12:36,559 --> 00:12:40,320 Speaker 1: pay attention to that either. I think that the the 225 00:12:40,400 --> 00:12:45,160 Speaker 1: government has spent a great deal of effort to try 226 00:12:45,200 --> 00:12:49,679 Speaker 1: and close off avenues of rescue. You know, the banks 227 00:12:50,000 --> 00:12:53,600 Speaker 1: may find it tough to increase lending because they are 228 00:12:53,640 --> 00:12:57,040 Speaker 1: at their limits. The central government made it us a 229 00:12:57,120 --> 00:13:02,480 Speaker 1: part of the fifty five year Plan to increase development 230 00:13:02,679 --> 00:13:09,560 Speaker 1: and financing for local and regional rejuvenation and urbanization. And 231 00:13:09,679 --> 00:13:13,160 Speaker 1: this was basically, you know, them putting money into the 232 00:13:13,200 --> 00:13:19,800 Speaker 1: pot for growing the equality of of real estate access 233 00:13:19,880 --> 00:13:23,440 Speaker 1: to people who didn't have that access before. However, that's 234 00:13:23,440 --> 00:13:27,200 Speaker 1: a very small part of the country. It's not small 235 00:13:27,240 --> 00:13:30,400 Speaker 1: in terms of people. But the land price starts lower, 236 00:13:30,880 --> 00:13:34,400 Speaker 1: the aspirations are lower, the total nominal amount spent is 237 00:13:34,440 --> 00:13:38,760 Speaker 1: lower um if you increase that by but you decrease 238 00:13:38,840 --> 00:13:43,240 Speaker 1: the the major urban centers by is a very large 239 00:13:43,360 --> 00:13:45,760 Speaker 1: net drop. Now, the other thing is that this is 240 00:13:45,840 --> 00:13:48,080 Speaker 1: this is a big part of the economy, right so 241 00:13:48,120 --> 00:13:53,080 Speaker 1: it's it's some odd percent of the economy residential real 242 00:13:53,200 --> 00:13:57,120 Speaker 1: estate is and that means that if you dampen its growth, 243 00:13:57,200 --> 00:14:00,360 Speaker 1: you dampen the growth of the overall economy. And another 244 00:14:00,400 --> 00:14:04,319 Speaker 1: part pivot of the five year Plan was they were 245 00:14:04,360 --> 00:14:09,319 Speaker 1: going to increase quality growth and decrease quantity of growth 246 00:14:09,440 --> 00:14:13,720 Speaker 1: or emphasize quality versus quantity. That means that they were 247 00:14:13,720 --> 00:14:17,240 Speaker 1: telling you very clearly, the stuff that we did before 248 00:14:17,320 --> 00:14:18,800 Speaker 1: to get a high growth rate, we're not going to 249 00:14:18,880 --> 00:14:22,560 Speaker 1: do it anymore. That's a policy decision. So I think 250 00:14:22,560 --> 00:14:26,120 Speaker 1: there's there's a fair bit of effort put into changing 251 00:14:26,400 --> 00:14:29,400 Speaker 1: the direction here. I think also that it's important to 252 00:14:29,440 --> 00:14:31,360 Speaker 1: notice that real estate is considered to be like the 253 00:14:31,440 --> 00:14:34,920 Speaker 1: driver of inequality. So if you want to decrease inequality, 254 00:14:35,120 --> 00:14:37,640 Speaker 1: you've got to decrease the inequality embedded in real estate. 255 00:14:54,960 --> 00:14:57,240 Speaker 1: So I want to get into how real estate actually 256 00:14:57,520 --> 00:15:01,680 Speaker 1: impacts all the various parts of the economy, including things 257 00:15:01,720 --> 00:15:05,360 Speaker 1: like local government financing. But before we do, you know, 258 00:15:05,440 --> 00:15:09,120 Speaker 1: you just described the response to the redlines policy, which 259 00:15:09,200 --> 00:15:12,720 Speaker 1: was basically I mean, it wasn't nothing. But the only 260 00:15:12,760 --> 00:15:16,800 Speaker 1: thing that developers could really do is try to shrink 261 00:15:17,280 --> 00:15:21,680 Speaker 1: sell off assets. I'm wondering, you know, even if they 262 00:15:21,720 --> 00:15:25,200 Speaker 1: sell off assets, they still have these massive liabilities that 263 00:15:25,240 --> 00:15:28,360 Speaker 1: they need to fund somehow. And given all the uncertainty 264 00:15:28,400 --> 00:15:31,080 Speaker 1: in the market, it seems very unlikely that a lot 265 00:15:31,120 --> 00:15:34,480 Speaker 1: of foreign investors are going to step into buy those 266 00:15:34,520 --> 00:15:38,520 Speaker 1: dollar bonds. So I'm curious, how are real estate developers 267 00:15:38,640 --> 00:15:43,920 Speaker 1: actually funding themselves right now. I ever, Grant spent much 268 00:15:43,960 --> 00:15:50,600 Speaker 1: of two thousand one extending the terms on its non 269 00:15:50,720 --> 00:15:53,520 Speaker 1: interest bearing liabilities. So if you look at the interest 270 00:15:53,560 --> 00:15:57,200 Speaker 1: bearing liabilities, they actually shrunk from December two thousand twenty 271 00:15:57,240 --> 00:16:01,400 Speaker 1: to June two one. If you look at the the 272 00:16:01,560 --> 00:16:08,840 Speaker 1: commercial bills or the trade payables, those increased. So the 273 00:16:09,000 --> 00:16:13,680 Speaker 1: debt numbers, which was the intersparing liabilities portion, that actually shrunk, 274 00:16:13,840 --> 00:16:17,040 Speaker 1: and they made their target of shrinking debt by a 275 00:16:17,120 --> 00:16:21,840 Speaker 1: hundred and fifty billion RMB. But that's that's doesn't help anything. 276 00:16:22,120 --> 00:16:24,640 Speaker 1: If you put more suppliers on the hook and they 277 00:16:24,640 --> 00:16:28,360 Speaker 1: stopped working for you, then you can't finish your project, 278 00:16:28,960 --> 00:16:32,000 Speaker 1: and that's what happened in the second half of two 279 00:16:33,200 --> 00:16:37,040 Speaker 1: If we ask ourselves what can replace the foreign funding, 280 00:16:37,080 --> 00:16:41,080 Speaker 1: that's a good question so far. I think in this 281 00:16:41,720 --> 00:16:45,479 Speaker 1: year there's something like thirty six billion dollars of redemptions 282 00:16:45,600 --> 00:16:50,480 Speaker 1: of the US dollar debt for Chinese developers. That's a 283 00:16:50,520 --> 00:16:52,520 Speaker 1: fair bit. That means that that money has got to 284 00:16:52,600 --> 00:16:55,600 Speaker 1: come from someplace else. It's not clear to me that 285 00:16:55,680 --> 00:16:59,520 Speaker 1: banks will want to increase there lending in order to 286 00:16:59,560 --> 00:17:03,840 Speaker 1: repay they're already under pressure to not increase. If you 287 00:17:03,880 --> 00:17:06,080 Speaker 1: look at what the n d r C said as 288 00:17:06,119 --> 00:17:10,160 Speaker 1: a side note to the four five year plan last year, 289 00:17:11,520 --> 00:17:13,440 Speaker 1: it was very clear they were going to crack down 290 00:17:13,680 --> 00:17:17,880 Speaker 1: on the unconstrained growth of local government debt and hidden debt, 291 00:17:19,080 --> 00:17:25,400 Speaker 1: and they were going to emphasize prudent fiscal rotation rather 292 00:17:25,520 --> 00:17:31,479 Speaker 1: than monetary easing in the sector and in the growth 293 00:17:31,520 --> 00:17:35,840 Speaker 1: mix of the economy. And Lika Shine came out and 294 00:17:35,880 --> 00:17:38,959 Speaker 1: said six people have been expecting a higher number, had 295 00:17:38,960 --> 00:17:40,720 Speaker 1: always been a higher number, and he came out with 296 00:17:40,760 --> 00:17:43,879 Speaker 1: a lower GDP target for two thow it ends up 297 00:17:43,920 --> 00:17:47,040 Speaker 1: higher than that according to the stats, but the willingness 298 00:17:47,040 --> 00:17:50,879 Speaker 1: to accept a lower target was seen as proof that 299 00:17:51,440 --> 00:17:55,320 Speaker 1: there was a goal to to crack down on on 300 00:17:55,520 --> 00:17:58,520 Speaker 1: the excesses of the quantity of growth versus quality of 301 00:17:58,520 --> 00:18:02,600 Speaker 1: growth problem. In this case, it's tough to see who 302 00:18:02,640 --> 00:18:04,880 Speaker 1: picks up the slack. If you look at foreign markets, 303 00:18:05,480 --> 00:18:09,120 Speaker 1: you know, the European markets or US markets, when the 304 00:18:09,240 --> 00:18:14,240 Speaker 1: end user stops buying, usually it comes out to longer, 305 00:18:15,480 --> 00:18:19,359 Speaker 1: more patient money buying at a discount. Oftentimes that's some 306 00:18:19,440 --> 00:18:23,240 Speaker 1: kind of private equity venture where people pull their funds together, 307 00:18:23,640 --> 00:18:27,520 Speaker 1: either incorporated or in a very professional fund buy the 308 00:18:27,600 --> 00:18:30,199 Speaker 1: assets and rent them out and hope that they can 309 00:18:30,240 --> 00:18:32,320 Speaker 1: wait for five years and sell them at a at 310 00:18:32,320 --> 00:18:37,400 Speaker 1: a markup. In August of two one, the government basically 311 00:18:37,560 --> 00:18:43,359 Speaker 1: ordered the entity which approves funds to stop approving private 312 00:18:43,359 --> 00:18:47,000 Speaker 1: equity funds in the residential real estate market because obviously 313 00:18:47,800 --> 00:18:52,200 Speaker 1: housing is for living in, not for speculation, and that 314 00:18:52,280 --> 00:18:58,639 Speaker 1: means that you won't see non developer companies coming in 315 00:18:58,680 --> 00:19:02,720 Speaker 1: to buy these projects unless they can convince people that 316 00:19:03,560 --> 00:19:06,080 Speaker 1: the project which they buy is for the betterment of 317 00:19:06,080 --> 00:19:09,919 Speaker 1: the company. Maybe they buy a project and develop an 318 00:19:09,960 --> 00:19:14,040 Speaker 1: asset and turn it into dormitories or something like that, 319 00:19:14,119 --> 00:19:15,919 Speaker 1: and they can convince the local government that it's the 320 00:19:15,920 --> 00:19:18,560 Speaker 1: appropriate thing to do to further, you know, the development 321 00:19:18,560 --> 00:19:21,800 Speaker 1: of the local economy. But it's basically going to come 322 00:19:21,800 --> 00:19:26,720 Speaker 1: down to s O s and s OE developers financing 323 00:19:26,880 --> 00:19:31,760 Speaker 1: the purchases of assets from troubled developers, and the other 324 00:19:32,040 --> 00:19:34,080 Speaker 1: place is going to have to be, you know, end 325 00:19:34,160 --> 00:19:36,120 Speaker 1: users are going to have to step up and right now, 326 00:19:36,160 --> 00:19:39,080 Speaker 1: you know, for the longest time, China has had a 327 00:19:39,119 --> 00:19:42,679 Speaker 1: real estate market which was characterized by prices go up 328 00:19:42,680 --> 00:19:44,840 Speaker 1: and demand goes up, prices go down, demand goes down. 329 00:19:45,200 --> 00:19:46,879 Speaker 1: It's a combination of a gift and good and a 330 00:19:46,920 --> 00:19:50,199 Speaker 1: Veblin good, depending on whether your status is housing as 331 00:19:50,240 --> 00:19:53,320 Speaker 1: a staple or housing is a luxury. In this case, 332 00:19:53,840 --> 00:19:57,240 Speaker 1: the government has warned, you know, pretty clearly, we don't 333 00:19:57,240 --> 00:19:59,959 Speaker 1: want you to speculate. So there goes the Veblin good. 334 00:20:00,680 --> 00:20:04,359 Speaker 1: They've introduced the concept of a property tax, and the 335 00:20:04,400 --> 00:20:08,880 Speaker 1: property tax means that everybody's ownership gets registered. There are 336 00:20:08,920 --> 00:20:11,119 Speaker 1: a whole bunch of people out there who don't want 337 00:20:11,320 --> 00:20:14,840 Speaker 1: to be known as the owner of five different properties. 338 00:20:15,800 --> 00:20:19,080 Speaker 1: And if you're if you're a communist party cadre in 339 00:20:19,240 --> 00:20:23,639 Speaker 1: some regional city where you you purchased a bunch of 340 00:20:23,680 --> 00:20:27,840 Speaker 1: properties at a very low price, and now you're the 341 00:20:27,840 --> 00:20:30,000 Speaker 1: owner of those properties, and it's really great, and you 342 00:20:30,040 --> 00:20:34,320 Speaker 1: are independently wealthy because you, your dog, your three year 343 00:20:34,320 --> 00:20:38,240 Speaker 1: old daughter, they all own properties. You don't want to 344 00:20:38,520 --> 00:20:40,480 Speaker 1: have the property tax come in and suddenly have to 345 00:20:40,520 --> 00:20:42,720 Speaker 1: figure out what to do. And if that happens, then 346 00:20:42,840 --> 00:20:47,960 Speaker 1: that actually creates, you know, another problem. Currently the developers 347 00:20:48,000 --> 00:20:51,040 Speaker 1: aren't selling as many properties as they want to, and 348 00:20:51,320 --> 00:20:57,120 Speaker 1: if luxury buyers and savings buyers, investment buyers can't buy 349 00:20:57,240 --> 00:21:01,399 Speaker 1: multiple properties anymore because of a they want to discourage speculation. 350 00:21:01,800 --> 00:21:05,520 Speaker 1: Then that reduces the total you know, new home sales 351 00:21:06,000 --> 00:21:09,879 Speaker 1: and a property tax would invite increased secondary home sales. 352 00:21:10,960 --> 00:21:14,800 Speaker 1: That's not a great thing for the market, and it's 353 00:21:14,840 --> 00:21:17,760 Speaker 1: honestly not a great thing for local governments because local 354 00:21:17,800 --> 00:21:21,800 Speaker 1: governments make their not by selling land to new property development. 355 00:21:22,359 --> 00:21:27,280 Speaker 1: And if if new property development stops and the rotation 356 00:21:27,320 --> 00:21:30,879 Speaker 1: comes from secondary property market where you know, must must 357 00:21:30,880 --> 00:21:35,240 Speaker 1: sell holders transfer to new people, well the local government 358 00:21:35,240 --> 00:21:37,480 Speaker 1: doesn't take a cut of that. So it's not sure 359 00:21:37,480 --> 00:21:40,400 Speaker 1: where all this money's gonna come from. It's so it's 360 00:21:40,400 --> 00:21:43,639 Speaker 1: so interesting. We just did an episode recently on the 361 00:21:43,720 --> 00:21:46,960 Speaker 1: lack of inventory in the US housing market and this 362 00:21:47,080 --> 00:21:49,960 Speaker 1: sort of rise of small landlords, people who might own 363 00:21:50,080 --> 00:21:52,760 Speaker 1: one to three or four homes, and the same issue 364 00:21:52,800 --> 00:21:55,880 Speaker 1: of like in states, California being the big one where 365 00:21:55,880 --> 00:21:58,240 Speaker 1: there isn't much of a tax on property, you just 366 00:21:58,280 --> 00:22:02,160 Speaker 1: get incentivized to hold and how placed, whether it's higher 367 00:22:02,160 --> 00:22:04,760 Speaker 1: taxes that match the value of the home, you sort 368 00:22:04,760 --> 00:22:09,159 Speaker 1: of create that churn and greater inventory. So it's interesting 369 00:22:09,200 --> 00:22:11,280 Speaker 1: to hear the same dynamic. I mean, it makes sense, 370 00:22:11,400 --> 00:22:13,639 Speaker 1: but it's interesting to hear the same dynamic in China. 371 00:22:14,080 --> 00:22:17,320 Speaker 1: So that I wanted to focus on though, is you know, 372 00:22:17,320 --> 00:22:19,360 Speaker 1: it seems to me when we talk about like debt, 373 00:22:20,000 --> 00:22:22,320 Speaker 1: you know, there's sort of like the financial debt and 374 00:22:22,359 --> 00:22:25,000 Speaker 1: the real debt and of course the financial data, the 375 00:22:25,040 --> 00:22:28,600 Speaker 1: bonds and the various payments that these companies have to make, 376 00:22:28,800 --> 00:22:31,280 Speaker 1: and then the real debt is of course the housing 377 00:22:31,400 --> 00:22:34,320 Speaker 1: units that the companies owe to people who have put 378 00:22:34,320 --> 00:22:36,400 Speaker 1: down a down payment, and it's a very big deal 379 00:22:36,400 --> 00:22:40,000 Speaker 1: if those aren't delivered in a timely manner. Talk about 380 00:22:40,000 --> 00:22:43,119 Speaker 1: the connection, like, what is it that has made the 381 00:22:43,200 --> 00:22:47,800 Speaker 1: actual like process of creating new units, creating new homes? 382 00:22:48,119 --> 00:22:51,480 Speaker 1: What caused these sort of like the physical process to 383 00:22:51,640 --> 00:22:54,480 Speaker 1: slow down such that the real debt has been difficult 384 00:22:54,840 --> 00:22:59,040 Speaker 1: for some of these developers to fulfill. Well, that comes 385 00:22:59,080 --> 00:23:02,120 Speaker 1: down to a financial debt actually, I mean the process 386 00:23:02,160 --> 00:23:05,080 Speaker 1: basically is developer says, I got a project, I want 387 00:23:05,080 --> 00:23:07,080 Speaker 1: to go bid for this land. He bids for the land. 388 00:23:07,119 --> 00:23:10,160 Speaker 1: He doesn't have to pay for it usually on day one. Instead, 389 00:23:10,160 --> 00:23:12,879 Speaker 1: he pays for it in a year, or he's got 390 00:23:12,920 --> 00:23:15,720 Speaker 1: a time limit says you must develop this within three years, 391 00:23:15,760 --> 00:23:17,639 Speaker 1: so you know, two years and a half later he 392 00:23:17,720 --> 00:23:21,879 Speaker 1: goes and starts developing. And developing means that they probably 393 00:23:21,880 --> 00:23:25,679 Speaker 1: have to break ground and put a foundation in. There 394 00:23:25,680 --> 00:23:28,880 Speaker 1: are different definitions depending on the different contract the developer 395 00:23:28,920 --> 00:23:31,080 Speaker 1: signs with the local government. When the local government sells 396 00:23:31,080 --> 00:23:34,280 Speaker 1: the land, however, you know, land prices go up ten 397 00:23:34,280 --> 00:23:37,879 Speaker 1: percent a year. If you don't have to pay until 398 00:23:38,080 --> 00:23:40,760 Speaker 1: year two and a half, you can promise to pay 399 00:23:40,800 --> 00:23:44,840 Speaker 1: a hundred, and land prices go up, you know, ten 400 00:23:44,880 --> 00:23:47,600 Speaker 1: percent a year, let's say, and in year two and 401 00:23:47,640 --> 00:23:49,399 Speaker 1: a half that hundred is now worth a hundred and 402 00:23:49,400 --> 00:23:51,800 Speaker 1: twenty five. And you all you gotta do is now 403 00:23:51,800 --> 00:23:55,280 Speaker 1: you've got to go fund a hundred two pay the 404 00:23:55,280 --> 00:23:57,720 Speaker 1: local government, and it's worth a hundred and twenty five. 405 00:23:57,720 --> 00:23:59,280 Speaker 1: It's on your books on a hundred and twenty five. 406 00:23:59,320 --> 00:24:02,920 Speaker 1: Then you go out pre sell it and because it's 407 00:24:02,920 --> 00:24:05,440 Speaker 1: worth and you only paid a hundred, the bank will 408 00:24:05,440 --> 00:24:08,080 Speaker 1: give you a small loan to start, you know, construction, 409 00:24:08,640 --> 00:24:11,240 Speaker 1: and you pre sell it and once you get to 410 00:24:11,320 --> 00:24:14,879 Speaker 1: a certain level of construction, then you can take the 411 00:24:15,119 --> 00:24:18,320 Speaker 1: full payment from the mortgage and that will all go 412 00:24:18,359 --> 00:24:21,679 Speaker 1: into an escrow account, and you know, different different localities 413 00:24:21,680 --> 00:24:25,200 Speaker 1: have different rules on how much money can be taken 414 00:24:25,200 --> 00:24:27,200 Speaker 1: out at what point in the process. Some of them 415 00:24:27,200 --> 00:24:32,520 Speaker 1: are extraordinarily detailed schedules. You know, if you if you 416 00:24:32,560 --> 00:24:36,240 Speaker 1: have a height of the building of forty then when 417 00:24:36,240 --> 00:24:39,320 Speaker 1: you get to seven ms and you can take out. 418 00:24:39,800 --> 00:24:42,080 Speaker 1: When you get to twelve ms, you can take out 419 00:24:42,600 --> 00:24:45,439 Speaker 1: a different level. And that money is meant you know, 420 00:24:45,840 --> 00:24:49,160 Speaker 1: to fund the work in progress so that the end 421 00:24:49,280 --> 00:24:52,000 Speaker 1: the money is out and the and the delivery is made. 422 00:24:52,760 --> 00:24:58,040 Speaker 1: A lot of these processes or projects were perhaps less 423 00:24:58,119 --> 00:25:03,000 Speaker 1: well supervised then they should have been. And this is 424 00:25:03,040 --> 00:25:04,600 Speaker 1: one of the things we're going to see, I think 425 00:25:04,600 --> 00:25:07,520 Speaker 1: in in Evergrand. What we saw last year was that 426 00:25:07,960 --> 00:25:12,560 Speaker 1: when it came out at ever Grand had taken money 427 00:25:12,560 --> 00:25:15,800 Speaker 1: out of the escrow account faster than it should have. 428 00:25:16,400 --> 00:25:18,560 Speaker 1: A bunch of local governments came in and started suing 429 00:25:18,560 --> 00:25:22,080 Speaker 1: ever Grant to get money put back in, and they 430 00:25:22,080 --> 00:25:24,199 Speaker 1: were successful and never Grand put the money back in. 431 00:25:24,480 --> 00:25:26,399 Speaker 1: But that was you know, again part of the Q 432 00:25:26,520 --> 00:25:29,679 Speaker 1: two problem last year where things started going south for 433 00:25:29,720 --> 00:25:32,920 Speaker 1: them as a result, you know, with the government cracking 434 00:25:32,960 --> 00:25:35,280 Speaker 1: down on banks saying you have to be more prudent. 435 00:25:35,320 --> 00:25:37,120 Speaker 1: You have to make sure you're not letting lending more. 436 00:25:37,160 --> 00:25:39,080 Speaker 1: They went in and did line by line on all 437 00:25:39,080 --> 00:25:42,720 Speaker 1: the exposure to the major developers, including especially Evergrand, and 438 00:25:42,960 --> 00:25:46,440 Speaker 1: all the local governments were you know, brought in to cooperate, 439 00:25:47,000 --> 00:25:50,880 Speaker 1: and that meant that they had to you know, excuse 440 00:25:50,960 --> 00:25:53,680 Speaker 1: my French, but do a c I a exercise, and 441 00:25:54,520 --> 00:25:57,400 Speaker 1: that meant that they got very strict. And one thing 442 00:25:57,400 --> 00:26:00,760 Speaker 1: we've seen here very recently is that there's been a 443 00:26:00,800 --> 00:26:03,280 Speaker 1: proposal in the past week or so which says that 444 00:26:03,320 --> 00:26:05,240 Speaker 1: the national government will come out with a new rule 445 00:26:05,280 --> 00:26:09,679 Speaker 1: on escrow accounts to supersede the local rules because perhaps 446 00:26:09,680 --> 00:26:12,439 Speaker 1: the local governments have now been too strict in in 447 00:26:12,840 --> 00:26:15,760 Speaker 1: releasing funds. So you've got this problem where it was 448 00:26:15,880 --> 00:26:20,199 Speaker 1: loosey goosey, and now it's much less loosey goosey. And 449 00:26:20,240 --> 00:26:23,560 Speaker 1: so there's been a there's been a a swing from 450 00:26:23,680 --> 00:26:26,359 Speaker 1: kind of over the curve to under the curve, and 451 00:26:27,440 --> 00:26:30,920 Speaker 1: developers use that money to go speculate, like you ever 452 00:26:31,000 --> 00:26:34,480 Speaker 1: Grant has a soccer team, it's building a stadium or 453 00:26:34,680 --> 00:26:36,879 Speaker 1: a bunch of stadiums. It owns this, that and the 454 00:26:36,880 --> 00:26:40,000 Speaker 1: other thing. There's been some large dividends paid out over years, 455 00:26:40,640 --> 00:26:43,960 Speaker 1: and there's certainly been some luxury spending on expenses, and 456 00:26:44,280 --> 00:26:48,280 Speaker 1: if you look at some of that, the money just disappeared. 457 00:26:48,320 --> 00:26:50,760 Speaker 1: There's just not enough money in the pot. And when 458 00:26:50,800 --> 00:26:53,960 Speaker 1: the government local governments start restricting the amount of money 459 00:26:53,960 --> 00:26:57,480 Speaker 1: coming out, you start being unable to pay your suppliers, 460 00:26:57,600 --> 00:27:00,280 Speaker 1: and instead you pay your suppliers with a note. We said, 461 00:27:00,400 --> 00:27:02,520 Speaker 1: rather than pay you cash, now, i'll pay you ten 462 00:27:02,560 --> 00:27:05,960 Speaker 1: percent more cash in three months. Well that starts that's 463 00:27:05,960 --> 00:27:08,240 Speaker 1: a financial liability because if you actually have to go 464 00:27:08,320 --> 00:27:11,639 Speaker 1: pay that guy in three months, well, now you need 465 00:27:11,680 --> 00:27:13,480 Speaker 1: to source that cash from someplace else, and they just 466 00:27:13,520 --> 00:27:17,640 Speaker 1: don't have that. They just started basically creating non interest 467 00:27:17,680 --> 00:27:22,639 Speaker 1: bearing but premium payout liabilities which they couldn't they couldn't 468 00:27:22,680 --> 00:27:25,199 Speaker 1: keep up with. So suppliers didn't get paid and they 469 00:27:25,240 --> 00:27:28,639 Speaker 1: stopped work. And then you know what really happened was 470 00:27:28,960 --> 00:27:31,280 Speaker 1: the government stepped in and said, you will pay your 471 00:27:31,280 --> 00:27:33,840 Speaker 1: suppliers in order to start these things working again, and 472 00:27:34,560 --> 00:27:36,800 Speaker 1: whatever you need to do it to pay your suppliers 473 00:27:36,840 --> 00:27:53,199 Speaker 1: to start working again. So you mentioned the possible change 474 00:27:53,240 --> 00:27:55,720 Speaker 1: in escrow rules, and I think this was one of 475 00:27:55,720 --> 00:27:59,000 Speaker 1: the things that sparked that very very brief rally that 476 00:27:59,080 --> 00:28:02,199 Speaker 1: I was talking about in the intro in property bonds. 477 00:28:02,280 --> 00:28:04,840 Speaker 1: And of course this week we also saw China cut 478 00:28:04,880 --> 00:28:08,240 Speaker 1: interest rates, and you know, it seems to be embarking 479 00:28:08,359 --> 00:28:11,920 Speaker 1: on some sort of easing cycle, which presumably would help 480 00:28:11,960 --> 00:28:14,800 Speaker 1: the property sector. I guess my question is, how do 481 00:28:14,880 --> 00:28:18,080 Speaker 1: we feel about the policy response right now? Does it 482 00:28:18,119 --> 00:28:21,359 Speaker 1: seem like the authorities are maybe trying to calibrate their 483 00:28:21,400 --> 00:28:25,760 Speaker 1: crackdown and their efforts to reduce leverage in the opposite direction, 484 00:28:25,840 --> 00:28:28,720 Speaker 1: So maybe they think they've gone too far and they 485 00:28:28,760 --> 00:28:31,600 Speaker 1: need to start to roll back some of these measures. 486 00:28:33,160 --> 00:28:35,640 Speaker 1: That's a good question. I think that we will continue 487 00:28:35,680 --> 00:28:40,360 Speaker 1: to see statements from the PBOC, from the c B 488 00:28:40,480 --> 00:28:45,240 Speaker 1: I r C, from the Financial Stability and Development Commission, 489 00:28:45,360 --> 00:28:48,440 Speaker 1: who's the you know, the top financial regulator. I think 490 00:28:48,440 --> 00:28:51,320 Speaker 1: we'll continue to see statements from all of these bodies 491 00:28:51,440 --> 00:28:58,680 Speaker 1: saying that China will not return to aggressive growth of 492 00:28:58,720 --> 00:29:01,960 Speaker 1: real estate to bail out the on me. They've said 493 00:29:01,960 --> 00:29:03,920 Speaker 1: that constantly. I think it's going to be the mantra 494 00:29:04,040 --> 00:29:07,520 Speaker 1: for a long while. The question I think we have 495 00:29:07,640 --> 00:29:09,840 Speaker 1: to get to is, and I think I mentioned this 496 00:29:09,880 --> 00:29:12,720 Speaker 1: The last time was you know, China is teaching a lesson, 497 00:29:12,800 --> 00:29:15,120 Speaker 1: and the question is how hard and to whom are 498 00:29:15,160 --> 00:29:17,600 Speaker 1: they teaching this lesson? And I don't think we've answered 499 00:29:17,600 --> 00:29:20,320 Speaker 1: that yet. The beginning question here was what is the 500 00:29:20,480 --> 00:29:23,440 Speaker 1: end game? I think the end game is is a 501 00:29:23,520 --> 00:29:28,040 Speaker 1: two thousand thirty to two thousand fifty outlook where we 502 00:29:28,160 --> 00:29:32,080 Speaker 1: have a China is a moderately prosperous society in two 503 00:29:32,080 --> 00:29:36,640 Speaker 1: thousand thirty and is a leader in global and regional markets, 504 00:29:36,840 --> 00:29:40,680 Speaker 1: and is has common prosperity for all. And if you 505 00:29:40,680 --> 00:29:43,920 Speaker 1: look at what Shi Jimping has said with regard to 506 00:29:43,960 --> 00:29:46,400 Speaker 1: his common prosperity, this is not a two thousand twenty 507 00:29:46,400 --> 00:29:49,080 Speaker 1: two thing. This is a long dated thing. So we 508 00:29:49,160 --> 00:29:50,960 Speaker 1: really have to look at where the long dated end 509 00:29:50,960 --> 00:29:53,120 Speaker 1: game is. And a long dated end game for common 510 00:29:53,160 --> 00:29:56,960 Speaker 1: prosperity means a reduction in inequality. And I think the 511 00:29:57,040 --> 00:30:01,080 Speaker 1: question has to be asked because China has a fujie 512 00:30:01,280 --> 00:30:05,480 Speaker 1: system where you have a you have your effective household 513 00:30:05,480 --> 00:30:09,760 Speaker 1: registration or if you will, local citizenship based on where 514 00:30:09,800 --> 00:30:11,800 Speaker 1: you live, and that really comes out to where you 515 00:30:11,840 --> 00:30:15,880 Speaker 1: were born. Uh, And the question is should Chinese people 516 00:30:15,960 --> 00:30:20,400 Speaker 1: have their relative wealth and prosperity determined by where they 517 00:30:20,400 --> 00:30:24,880 Speaker 1: were born, and that is a particularly un siji being 518 00:30:25,000 --> 00:30:28,280 Speaker 1: kind of attitude. So I think that he's looking at 519 00:30:28,320 --> 00:30:29,840 Speaker 1: that and saying, no, that's not the way it should 520 00:30:29,840 --> 00:30:31,600 Speaker 1: be done. And if you look at, for example, to 521 00:30:31,760 --> 00:30:33,800 Speaker 1: the changes in the education sector in the past year, 522 00:30:33,840 --> 00:30:37,360 Speaker 1: that's very clearly you know, let's not give excess advantage 523 00:30:37,400 --> 00:30:39,960 Speaker 1: to those who happen to have excess funds right now, 524 00:30:41,040 --> 00:30:46,160 Speaker 1: let's make education something accessible to all. And I think 525 00:30:46,200 --> 00:30:48,280 Speaker 1: that he's looking at real estate much the same way. 526 00:30:48,440 --> 00:30:50,640 Speaker 1: And the question here is, well, is that unfair to 527 00:30:50,680 --> 00:30:53,080 Speaker 1: the people who bought all the property? Well, then the 528 00:30:53,160 --> 00:30:55,560 Speaker 1: question is is that unfair to all the rich people? 529 00:30:56,240 --> 00:30:58,360 Speaker 1: And I think his answer might be, well, you know, 530 00:30:58,480 --> 00:31:00,880 Speaker 1: that's just one of those things. So I think if 531 00:31:00,920 --> 00:31:03,280 Speaker 1: we look at the end game, the endgame is clearly 532 00:31:03,960 --> 00:31:11,479 Speaker 1: a very non capitalist, non libertarian, socialist view of the 533 00:31:11,480 --> 00:31:15,760 Speaker 1: way assets should be distributed across an economy. And if 534 00:31:15,760 --> 00:31:17,840 Speaker 1: I look at that, that means that there's a bunch 535 00:31:17,840 --> 00:31:19,480 Speaker 1: of people who are going to hurt. And if you 536 00:31:19,480 --> 00:31:22,560 Speaker 1: think about what the developers really represent and all of us, 537 00:31:22,640 --> 00:31:24,920 Speaker 1: you know, there's been something like eighty billion dollars of 538 00:31:25,000 --> 00:31:28,080 Speaker 1: value lost in the offshore bond markets or Chinese developers 539 00:31:28,080 --> 00:31:32,240 Speaker 1: in the past year. Great well, most of the developers 540 00:31:32,240 --> 00:31:35,640 Speaker 1: are still functioning and building houses. Contract sales are down, 541 00:31:35,680 --> 00:31:37,960 Speaker 1: but they are still out there everyday building houses and 542 00:31:37,960 --> 00:31:41,440 Speaker 1: delivering houses to their homes to their home buyers. What 543 00:31:41,560 --> 00:31:44,640 Speaker 1: has been lost has been the capital ownership of those entities. 544 00:31:44,720 --> 00:31:47,560 Speaker 1: Those operating entities continue to operate and will continue to build, 545 00:31:48,080 --> 00:31:50,760 Speaker 1: and as long as they fulfill a social function, then 546 00:31:50,840 --> 00:31:54,440 Speaker 1: that's what the end goal is going to be. Now, 547 00:31:54,720 --> 00:31:57,240 Speaker 1: capital owners and capital providers are going to take a 548 00:31:57,240 --> 00:32:00,200 Speaker 1: big hit here. They already have and I don't see 549 00:32:00,200 --> 00:32:04,200 Speaker 1: it getting much better, but you don't see such pain 550 00:32:05,000 --> 00:32:07,560 Speaker 1: they have to backtrack, and so you talk about twenty 551 00:32:07,680 --> 00:32:12,840 Speaker 1: thirty or what what the endgame looks like. Real estate 552 00:32:13,000 --> 00:32:15,680 Speaker 1: is not such an important part of the economy, and 553 00:32:16,000 --> 00:32:18,960 Speaker 1: the wealthy who brought up multiple homes early have taken 554 00:32:19,000 --> 00:32:21,000 Speaker 1: a hit. Can they? I mean, I guess the question 555 00:32:21,040 --> 00:32:23,719 Speaker 1: is can they get there without having to backcheck or 556 00:32:24,080 --> 00:32:26,920 Speaker 1: would there be so much acute pain in the meantime 557 00:32:27,080 --> 00:32:30,360 Speaker 1: from people who do have equity in uh in their 558 00:32:30,400 --> 00:32:34,040 Speaker 1: own home or so forth, such that it becomes untenable 559 00:32:34,120 --> 00:32:37,600 Speaker 1: to go all the way through without further easy or 560 00:32:37,640 --> 00:32:40,840 Speaker 1: without further sort of like juicing the sector. Again, I 561 00:32:40,880 --> 00:32:43,520 Speaker 1: think this comes down to what is what is acceptable 562 00:32:43,520 --> 00:32:46,719 Speaker 1: and what is not acceptable as a response, And if 563 00:32:46,760 --> 00:32:48,360 Speaker 1: you look at what the PBOC and c d i 564 00:32:48,440 --> 00:32:52,280 Speaker 1: RC have said specifically about Evergrand, it's almost exactly the 565 00:32:52,320 --> 00:32:55,080 Speaker 1: same wording they used about H and A. This company 566 00:32:55,160 --> 00:33:01,840 Speaker 1: exercised poor management and took blind risk for expansion. And 567 00:33:02,480 --> 00:33:05,840 Speaker 1: this is the chickens coming home to roost and there's 568 00:33:05,840 --> 00:33:08,360 Speaker 1: no pity for them here. And what that also tells 569 00:33:08,400 --> 00:33:10,480 Speaker 1: you is that you know there will be heads will 570 00:33:10,560 --> 00:33:13,560 Speaker 1: roll on this. There will be as John gall Braves 571 00:33:13,600 --> 00:33:15,920 Speaker 1: put it in when you've described the bezel, and we're 572 00:33:15,920 --> 00:33:18,000 Speaker 1: you know, Michael Pettis and I have both described this 573 00:33:18,560 --> 00:33:20,800 Speaker 1: as the downside of the bezel, the discovery phase of 574 00:33:20,800 --> 00:33:25,040 Speaker 1: the bezel. Audits are are penetrating and meticulous. People are 575 00:33:25,160 --> 00:33:28,600 Speaker 1: assumed to be dishonest until they're proven otherwise, and commercial 576 00:33:28,640 --> 00:33:32,720 Speaker 1: morality improves when the truth comes out. I think we're 577 00:33:32,720 --> 00:33:35,400 Speaker 1: going to see that, and I think that's what that's 578 00:33:35,400 --> 00:33:38,960 Speaker 1: what the goal is here. So the trick is what 579 00:33:39,240 --> 00:33:43,120 Speaker 1: is acceptable and what is unacceptable. You know, speculators losing money, 580 00:33:43,320 --> 00:33:48,640 Speaker 1: that's acceptable. Home Buyers in the streets, that's unacceptable. Forty 581 00:33:48,680 --> 00:33:55,160 Speaker 1: million migrant laborers involved in the real estate construction sector 582 00:33:55,720 --> 00:33:58,840 Speaker 1: out of work and not getting paid and not being 583 00:33:58,840 --> 00:34:01,800 Speaker 1: able to eat. That's a real problem. And so I 584 00:34:01,840 --> 00:34:05,320 Speaker 1: think that there's a there's a difference between what is 585 00:34:05,840 --> 00:34:08,520 Speaker 1: deemed to be an acceptable risk and was deemed to 586 00:34:08,520 --> 00:34:11,840 Speaker 1: be an unacceptable risk. In this particular case, there's obviously 587 00:34:11,880 --> 00:34:16,280 Speaker 1: a path risk, and I don't think that China has 588 00:34:16,520 --> 00:34:21,520 Speaker 1: adequately prepared to the ground for that financing path. And 589 00:34:21,520 --> 00:34:25,279 Speaker 1: the financing path in the end comes down to the 590 00:34:25,560 --> 00:34:28,799 Speaker 1: local governments. So this is something that you and I 591 00:34:28,840 --> 00:34:32,879 Speaker 1: have discussed previously. And one way I like to think 592 00:34:32,880 --> 00:34:35,400 Speaker 1: about the housing market and the way it fits into 593 00:34:35,480 --> 00:34:39,800 Speaker 1: China's financial system is sort of like a supply chain. 594 00:34:40,000 --> 00:34:42,600 Speaker 1: And I think you said this, but a supply chain 595 00:34:42,640 --> 00:34:46,399 Speaker 1: of capital, right, it's moving in a straight line, and 596 00:34:46,640 --> 00:34:50,239 Speaker 1: one disruption at one end of the capital supply chain 597 00:34:50,320 --> 00:34:54,120 Speaker 1: is going to reverberate and have consequences for other things 598 00:34:54,280 --> 00:34:57,239 Speaker 1: further down the supply chain. So maybe you can walk 599 00:34:57,320 --> 00:35:00,520 Speaker 1: us through those connections and how a disturb in the 600 00:35:00,560 --> 00:35:05,680 Speaker 1: housing market. Lower inventory, lower prices might actually have a 601 00:35:05,800 --> 00:35:10,440 Speaker 1: knock on effect to things like local governments, Chinese banks 602 00:35:11,280 --> 00:35:15,319 Speaker 1: so ease, state owned enterprises and things like that. If 603 00:35:15,320 --> 00:35:18,279 Speaker 1: we look at the status, if we think about this 604 00:35:18,360 --> 00:35:21,160 Speaker 1: as as a shooting star, it's shot up. There was 605 00:35:21,160 --> 00:35:23,920 Speaker 1: a lot of profit under the curve, a lot of 606 00:35:23,960 --> 00:35:29,360 Speaker 1: spread taken out by different parties, and growth, a nominal growth, 607 00:35:29,360 --> 00:35:32,080 Speaker 1: which was quantity of growth rather than quality of growth. 608 00:35:32,560 --> 00:35:34,800 Speaker 1: The pivot point in all of this is the supply 609 00:35:34,880 --> 00:35:38,040 Speaker 1: of land. The government of China owns all the land 610 00:35:38,280 --> 00:35:42,360 Speaker 1: in the early nineties that the decision on who sold 611 00:35:42,480 --> 00:35:45,440 Speaker 1: land to whom was then delegated to the local governments, 612 00:35:45,440 --> 00:35:48,400 Speaker 1: and the local governments could raise revenue because they were 613 00:35:48,400 --> 00:35:52,120 Speaker 1: not allowed to issue definite bonds, they could raise revenue 614 00:35:52,160 --> 00:35:55,360 Speaker 1: by by by selling land. And they would sell land 615 00:35:55,480 --> 00:35:57,200 Speaker 1: and then the developer would develop it, and then they 616 00:35:57,239 --> 00:36:01,320 Speaker 1: would earn a developer tax from the from the developers 617 00:36:01,400 --> 00:36:06,719 Speaker 1: sale of the land and property to buyers. If we 618 00:36:06,760 --> 00:36:12,000 Speaker 1: look at the local government funding sources, something like thirty 619 00:36:13,480 --> 00:36:17,440 Speaker 1: is across all of China is in the sale of 620 00:36:18,600 --> 00:36:22,280 Speaker 1: land and the special taxes which come from the development. 621 00:36:22,920 --> 00:36:25,840 Speaker 1: That's a very big portion of you know, local government funding, 622 00:36:26,480 --> 00:36:30,279 Speaker 1: and that has been growing, you know, roughly in line 623 00:36:30,320 --> 00:36:33,319 Speaker 1: with GDP because it's a big part of GDP. When 624 00:36:33,320 --> 00:36:36,440 Speaker 1: we look at this supply chain of capital, h you know, 625 00:36:36,440 --> 00:36:40,080 Speaker 1: the people providing capital, those people providing capital, they provide 626 00:36:40,120 --> 00:36:43,399 Speaker 1: it to a developer who buys the asset. Then the 627 00:36:43,480 --> 00:36:48,040 Speaker 1: asset is rotated into savings capital, which is purchased by 628 00:36:48,040 --> 00:36:51,520 Speaker 1: the the new home buyer or the investor. And if 629 00:36:51,560 --> 00:36:53,560 Speaker 1: you think about these, there's a there are a bunch 630 00:36:53,560 --> 00:36:57,360 Speaker 1: of flows going on. If the local governments have sold 631 00:36:57,360 --> 00:36:59,800 Speaker 1: a lot of land and that is going to decrease, 632 00:37:00,120 --> 00:37:02,279 Speaker 1: that means that the grade of growth that they are 633 00:37:02,320 --> 00:37:06,000 Speaker 1: able to raise money at will drop. We can look 634 00:37:06,040 --> 00:37:08,880 Speaker 1: at this and say, you know, in two thousand there 635 00:37:08,920 --> 00:37:11,839 Speaker 1: was no such thing as a land bank. Governments were 636 00:37:11,840 --> 00:37:15,200 Speaker 1: starting out from scratch, Developers were starting out from scratch, 637 00:37:15,400 --> 00:37:17,080 Speaker 1: and then we ran into the you know, the late 638 00:37:17,120 --> 00:37:19,400 Speaker 1: naughties problem, the GFC, and then there was suddenly a 639 00:37:19,400 --> 00:37:22,279 Speaker 1: burst of financing. But the burst of financing allowed developers 640 00:37:22,280 --> 00:37:24,280 Speaker 1: to build land bank. So if we take the idea 641 00:37:24,280 --> 00:37:26,839 Speaker 1: of a land bank, from two thousand ten to two 642 00:37:26,880 --> 00:37:31,759 Speaker 1: thousand twenty, developers have grown land bank to be you know, 643 00:37:31,920 --> 00:37:35,480 Speaker 1: on average, something like three years worth of land on 644 00:37:35,520 --> 00:37:39,840 Speaker 1: their books, and that means that local governments have sold 645 00:37:40,040 --> 00:37:44,319 Speaker 1: thirteen years worth of land in ten years. If we 646 00:37:44,360 --> 00:37:46,719 Speaker 1: look forward and we say that the developers aren't going 647 00:37:46,760 --> 00:37:48,879 Speaker 1: to be able to carry that because you know, they're 648 00:37:48,960 --> 00:37:53,680 Speaker 1: high funding costs uh and the lower sales rate means 649 00:37:53,719 --> 00:37:55,719 Speaker 1: that they simply can't hold it. They will burn through 650 00:37:55,760 --> 00:37:59,800 Speaker 1: their inventory. But over the next ten years, basically the 651 00:37:59,840 --> 00:38:04,000 Speaker 1: low governments will sell eight years worth of land bank 652 00:38:04,520 --> 00:38:06,879 Speaker 1: to the developers who will then spend ten years worth 653 00:38:06,880 --> 00:38:11,520 Speaker 1: of land bank. So they were you know, earning at 654 00:38:11,640 --> 00:38:15,040 Speaker 1: thirteen years out of ten so of what they probably 655 00:38:15,040 --> 00:38:17,839 Speaker 1: should have, and now they're going to melt back down 656 00:38:17,880 --> 00:38:20,880 Speaker 1: to eight years out of ten. Let's say that's drop 657 00:38:21,760 --> 00:38:25,359 Speaker 1: versus your straight line growth, and drop is a lot 658 00:38:25,400 --> 00:38:29,600 Speaker 1: of money to be taken out of the flow into 659 00:38:29,880 --> 00:38:34,080 Speaker 1: local government coffers. And that's where the pivot point comes. 660 00:38:34,480 --> 00:38:36,879 Speaker 1: If we look at all of these the logistics here. 661 00:38:37,320 --> 00:38:40,720 Speaker 1: You know, real estate is a local government funding source. 662 00:38:41,480 --> 00:38:45,080 Speaker 1: It is a g d P source because all of 663 00:38:45,120 --> 00:38:49,880 Speaker 1: the development creates jobs. It creates construction jobs, financing jobs. 664 00:38:50,880 --> 00:38:55,080 Speaker 1: Mortgage spread is the single biggest contributor to the bottom 665 00:38:55,120 --> 00:38:58,720 Speaker 1: line of most Chinese banks. There's a there's a clear 666 00:38:59,520 --> 00:39:02,440 Speaker 1: incentive for everybody to have this all go well. But 667 00:39:02,600 --> 00:39:06,520 Speaker 1: when it doesn't go well, you know, volume drops, spread drops, 668 00:39:07,440 --> 00:39:10,360 Speaker 1: volume drops on the sales, land sales, and local governments 669 00:39:10,360 --> 00:39:15,920 Speaker 1: find themselves unable to fund their other infrastructure products. And 670 00:39:16,640 --> 00:39:20,400 Speaker 1: that means fewer jobs. Uh, And it means that savings 671 00:39:20,440 --> 00:39:23,040 Speaker 1: assets are not created at the same rate they were 672 00:39:23,040 --> 00:39:26,480 Speaker 1: created before. In the end, I think that people are 673 00:39:26,520 --> 00:39:29,400 Speaker 1: okay with the idea that savings assets, which are heavily 674 00:39:29,520 --> 00:39:36,080 Speaker 1: levered aren't created because it's a relatively low spread asset. 675 00:39:36,520 --> 00:39:39,080 Speaker 1: A lot of these assets aren't earning any money. People 676 00:39:39,120 --> 00:39:42,560 Speaker 1: are financing them, but they're just held empty. So it's 677 00:39:42,600 --> 00:39:46,520 Speaker 1: it's a relatively inefficient way to create a gross levered 678 00:39:46,880 --> 00:39:50,560 Speaker 1: financial asset. But all of this stuff between then, you know, 679 00:39:50,760 --> 00:39:56,760 Speaker 1: local government financing, GDP, jobs, bank health, it's all connected. 680 00:39:57,040 --> 00:40:00,359 Speaker 1: And when you put a stop on one end of it, 681 00:40:00,480 --> 00:40:03,839 Speaker 1: that means, you know, the block cascades through the chain. 682 00:40:04,560 --> 00:40:09,160 Speaker 1: I'd like to point people to Michael Pettis is odd Lots. 683 00:40:09,160 --> 00:40:12,919 Speaker 1: Back in October, he really addressed this issue of expansion 684 00:40:12,960 --> 00:40:16,920 Speaker 1: and contraction and local government as a place where it 685 00:40:17,000 --> 00:40:19,319 Speaker 1: was going to hurt. I think that is part and 686 00:40:19,440 --> 00:40:22,759 Speaker 1: parcel of where we're going to see the problem addressed. 687 00:40:23,080 --> 00:40:28,360 Speaker 1: In the end. The biggest savior here will be probably 688 00:40:28,440 --> 00:40:33,040 Speaker 1: local governments selling land to local government financing vehicles who 689 00:40:33,120 --> 00:40:37,200 Speaker 1: will then build low income housing that will create jobs, 690 00:40:37,200 --> 00:40:40,840 Speaker 1: It will create spread, and perhaps they will rent those 691 00:40:40,880 --> 00:40:46,080 Speaker 1: two low income households on a kind of a rent 692 00:40:46,160 --> 00:40:49,960 Speaker 1: to own basis, so that people are building a certain 693 00:40:50,280 --> 00:40:55,360 Speaker 1: wealth and basis of future prosperity for their household and 694 00:40:55,440 --> 00:40:59,880 Speaker 1: it will in effect dampen the pain that we're seeing. 695 00:41:00,200 --> 00:41:02,440 Speaker 1: But I don't think that we're going to see a 696 00:41:02,480 --> 00:41:05,800 Speaker 1: return to people buying five or six apartments in a 697 00:41:05,880 --> 00:41:10,440 Speaker 1: project because they can and expecting, you know, property prices 698 00:41:10,480 --> 00:41:13,840 Speaker 1: to rise fifteen a year for the foreseeable future. I 699 00:41:13,880 --> 00:41:17,600 Speaker 1: don't think that that's coming back. Travis. That was a 700 00:41:17,640 --> 00:41:22,040 Speaker 1: fantastic explanation and update of what's going on. Really appreciate 701 00:41:22,080 --> 00:41:25,360 Speaker 1: you coming back on all thoughts. Thank you all right, Travis, 702 00:41:25,400 --> 00:41:40,960 Speaker 1: Thank you so much. So It's always great having Travis 703 00:41:40,960 --> 00:41:44,320 Speaker 1: on because he's immensely knowledgeable about pretty much any space 704 00:41:44,360 --> 00:41:46,839 Speaker 1: you throw at him. But I thought, in particular, what 705 00:41:46,880 --> 00:41:49,920 Speaker 1: was interesting in that well, I thought the thing that 706 00:41:49,960 --> 00:41:53,160 Speaker 1: stood out in that conversation was the emphasis on changing 707 00:41:53,239 --> 00:41:57,120 Speaker 1: the quality or the makeup of China's growth, the idea 708 00:41:57,200 --> 00:42:00,200 Speaker 1: that you don't want to have financialized growth anymore, or 709 00:42:00,239 --> 00:42:03,279 Speaker 1: not as much of it. You don't want growth that's 710 00:42:03,360 --> 00:42:07,160 Speaker 1: driven by asset price inflation and debt and leverage, and 711 00:42:07,200 --> 00:42:09,879 Speaker 1: so you're taking leverage out of the system. I mean, 712 00:42:09,960 --> 00:42:12,960 Speaker 1: China has been pretty direct about doing this. If you're 713 00:42:13,000 --> 00:42:15,520 Speaker 1: taking leverage out of the system and saying that you 714 00:42:15,560 --> 00:42:19,680 Speaker 1: don't want housing to be purely for speculation, then inevitably 715 00:42:19,719 --> 00:42:22,120 Speaker 1: those prices are going to have to fall and funding 716 00:42:22,280 --> 00:42:24,800 Speaker 1: is going to fall too, And that's the big question 717 00:42:24,880 --> 00:42:28,919 Speaker 1: for me, like where does the money actually come from 718 00:42:28,960 --> 00:42:31,440 Speaker 1: and how much of it will be available because that's 719 00:42:31,719 --> 00:42:37,200 Speaker 1: also going to dictate warehouse prices actually end up, right, Yeah, 720 00:42:37,239 --> 00:42:41,160 Speaker 1: And this idea that or the goal like can you 721 00:42:41,320 --> 00:42:46,560 Speaker 1: sort of hurt the capitalists, the investors, the bond holders 722 00:42:46,840 --> 00:42:51,400 Speaker 1: while also maintaining a healthy pace of volume growth in 723 00:42:51,480 --> 00:42:54,560 Speaker 1: homes like building more homes or making more homes available, 724 00:42:54,560 --> 00:42:58,319 Speaker 1: because obviously that's still a multi year priority and there's 725 00:42:58,360 --> 00:43:00,680 Speaker 1: a lot of development yet to be done, and and 726 00:43:00,760 --> 00:43:05,480 Speaker 1: as he described it, like the existing system was very 727 00:43:05,480 --> 00:43:08,000 Speaker 1: friendly to capital and there were all these ways to 728 00:43:08,600 --> 00:43:10,560 Speaker 1: I don't know if game is the right word, but 729 00:43:10,719 --> 00:43:13,840 Speaker 1: let's say make easy money in the example of Okay, 730 00:43:13,880 --> 00:43:16,000 Speaker 1: you buy land from the government at X, but you 731 00:43:16,000 --> 00:43:18,359 Speaker 1: don't have to pay it for a while, and then 732 00:43:18,360 --> 00:43:20,799 Speaker 1: by the time you do pay, it's up, and then 733 00:43:20,840 --> 00:43:23,080 Speaker 1: you can take money out of the system by the 734 00:43:23,120 --> 00:43:25,719 Speaker 1: time you've done a little bit. And so essentially, like 735 00:43:25,760 --> 00:43:28,399 Speaker 1: there's the leverage, and the question is can you keep 736 00:43:28,440 --> 00:43:31,719 Speaker 1: up that same pace of home creation while making it 737 00:43:31,840 --> 00:43:38,239 Speaker 1: less capital friendly? Is like a really interesting thing to watch. Yeah, well, 738 00:43:38,280 --> 00:43:40,919 Speaker 1: I thought the idea of China sort of killing two 739 00:43:40,920 --> 00:43:44,319 Speaker 1: birds with one stone by building low income housing that 740 00:43:44,360 --> 00:43:47,600 Speaker 1: will hopefully replace some of the lost inventory. Yes, that's 741 00:43:47,640 --> 00:43:50,120 Speaker 1: a really interesting notion and it makes a lot of 742 00:43:50,160 --> 00:43:54,200 Speaker 1: sense from a policy standpoint, So it'll be interesting to 743 00:43:54,200 --> 00:43:56,960 Speaker 1: see whether or not we actually see that. Now. It's 744 00:43:57,000 --> 00:44:01,120 Speaker 1: kind of interesting that, like in any economy anywhere around 745 00:44:01,120 --> 00:44:03,759 Speaker 1: the world, like especially these days, it's like whether the 746 00:44:03,800 --> 00:44:06,160 Speaker 1: US are trying to like there is this demand for 747 00:44:06,280 --> 00:44:09,680 Speaker 1: more house like more home volume, like people want, and 748 00:44:09,760 --> 00:44:15,560 Speaker 1: yet you know, you don't really see modern governments at least, 749 00:44:15,840 --> 00:44:17,640 Speaker 1: you know, at least in the West talking about like 750 00:44:17,840 --> 00:44:21,280 Speaker 1: the number of new homes built as a mad major 751 00:44:21,440 --> 00:44:23,160 Speaker 1: measuring stake, you know, the US to talk about like 752 00:44:23,160 --> 00:44:26,359 Speaker 1: wages and job creation, etcetera. But no, I've never heard 753 00:44:26,360 --> 00:44:29,040 Speaker 1: like a politician say like, oh, well we built two 754 00:44:29,080 --> 00:44:31,480 Speaker 1: million homes. Under my watcher, we built a million. You know, 755 00:44:31,680 --> 00:44:34,120 Speaker 1: but it would be intuitive, and so it would be 756 00:44:34,160 --> 00:44:37,759 Speaker 1: interesting if China, whe it's more sort of top down policy, 757 00:44:37,960 --> 00:44:41,600 Speaker 1: can just sort of like manufacture homes in a way 758 00:44:41,600 --> 00:44:45,120 Speaker 1: that's separate from the capital markets process totally. It makes 759 00:44:45,160 --> 00:44:47,319 Speaker 1: a lot of sense from a policy standpoint. But yeah, 760 00:44:47,360 --> 00:44:52,680 Speaker 1: you're right, historically it just hasn't been emphasized, although I 761 00:44:52,760 --> 00:44:55,960 Speaker 1: think in the UK politicians do make housings supply quite 762 00:44:56,120 --> 00:44:59,200 Speaker 1: a talking point. Um. But maybe that's yeah, maybe that's 763 00:44:59,200 --> 00:45:02,319 Speaker 1: a conversation another day. Shall we leave it there. Let's 764 00:45:02,360 --> 00:45:06,160 Speaker 1: leave it there alright. This has been another episode of 765 00:45:06,200 --> 00:45:09,080 Speaker 1: the Odd Thoughts podcast. I'm Tracy Alloway. You can follow 766 00:45:09,080 --> 00:45:12,680 Speaker 1: me on Twitter at Tracy Alloway and I'm Joe wi 767 00:45:12,719 --> 00:45:15,000 Speaker 1: Isn't all. You could follow me on Twitter at the 768 00:45:15,040 --> 00:45:19,680 Speaker 1: Stalwart follow our guest Travis Lundie. He's at Travis Lundi Asia. 769 00:45:20,080 --> 00:45:23,920 Speaker 1: Follow our producer Laura Carlson at Laura M. Carlson. Follow 770 00:45:23,960 --> 00:45:27,480 Speaker 1: the Bloomberg head of podcast, Francesco Levi at Francesca Today, 771 00:45:27,960 --> 00:45:30,919 Speaker 1: and check out all of our podcast at Bloomberg under 772 00:45:30,960 --> 00:46:01,000 Speaker 1: the handle at podcasts. Thanks for listening, O