WEBVTT - This Is the Evergrande Endgame as China’s Property Problems Spread 0:00:10.800 --> 0:00:14.280 Hello, and welcome to another episode of the All Thoughts podcast. 0:00:14.360 --> 0:00:19.000 I'm Tracy Alloway and I'm Joe. So Joe, it feels 0:00:19.120 --> 0:00:23.959 like it's another day, another default by a Chinese property developer, 0:00:24.400 --> 0:00:27.040 and so just today, I should say we're recording this. 0:00:27.200 --> 0:00:32.000 On January, we saw a company called Oian I'm probably 0:00:32.200 --> 0:00:35.440 not pronouncing that right, saying that it won't make payments 0:00:35.600 --> 0:00:39.600 on four bonds that I think add up to almost 0:00:39.680 --> 0:00:44.360 seven hundred million dollars. But here's the weird thing. For 0:00:44.479 --> 0:00:48.239 a brief moment this week, it seemed like people investors 0:00:48.400 --> 0:00:52.200 were getting more optimistic about the Chinese real estate space. 0:00:52.440 --> 0:00:55.760 We actually saw a pretty dramatic rally in dollar bonds 0:00:55.880 --> 0:01:00.000 from junk rated property developers because there were some reports 0:01:00.040 --> 0:01:03.280 that China would make it easier for property companies to 0:01:03.320 --> 0:01:06.640 get cash from pre sales of developments. And then of 0:01:06.680 --> 0:01:10.800 course we saw China lower its interest rates earlier this week, 0:01:10.920 --> 0:01:14.280 which you know, obviously monetary easing is going to be 0:01:14.360 --> 0:01:17.279 good for housing. So there seemed to be these really 0:01:17.480 --> 0:01:21.720 opposite push pull factors at the moment, and no one 0:01:21.760 --> 0:01:24.840 seems to know quite what is going on in the space. 0:01:25.760 --> 0:01:28.080 I have to say, I kind of missed, you know, 0:01:28.319 --> 0:01:30.360 in all the my scanning of the news, I actually 0:01:30.400 --> 0:01:33.600 kind of missed the optimism period you were talking about 0:01:33.840 --> 0:01:37.440 because every time, I mean it was only a day. Okay, 0:01:37.520 --> 0:01:40.280 we're back to pessimism already, because I have to say, 0:01:40.360 --> 0:01:43.720 like every time I read like you know, obviously look 0:01:43.760 --> 0:01:45.920 at uh sort of like Q four of last year, 0:01:45.959 --> 0:01:48.760 we're talking a lot about ever Ground and the trouble 0:01:48.840 --> 0:01:52.160 they were getting into, and it feels like since then 0:01:52.320 --> 0:01:56.520 things have metaestasized, more developers getting into trouble, more fears 0:01:56.520 --> 0:02:00.800 of default, maybe companies that were perceived as a safer 0:02:00.840 --> 0:02:04.360 credit risks than ever Grand was getting into trouble. So 0:02:04.400 --> 0:02:06.320 it really feels that the big story, or at least 0:02:06.320 --> 0:02:08.480 every time I look into it, it's like this situation 0:02:08.560 --> 0:02:11.760 is getting worse. Yeah, So we haven't really seen an 0:02:11.800 --> 0:02:15.600 extreme financial crisis like a Lehman moment that some people 0:02:15.639 --> 0:02:18.640 were talking about, you know, late last year. But we 0:02:18.760 --> 0:02:22.320 have seen contagion in the sense that we have seen 0:02:22.400 --> 0:02:25.960 spreads on other junk rated dollar bonds go up quite 0:02:25.960 --> 0:02:29.280 a bit. But really, I think the question no one 0:02:29.400 --> 0:02:33.079 quite knows yet is what exactly is the end game here? 0:02:33.240 --> 0:02:37.160 Like what exactly is China trying to achieve. Are they 0:02:37.200 --> 0:02:40.760 going to provide policy support for property developers or are 0:02:40.800 --> 0:02:44.440 they going to reform the market and let the weaker 0:02:44.600 --> 0:02:48.400 players fail. So today I'm very pleased to say that 0:02:48.440 --> 0:02:50.560 we have the perfect person to come on and give 0:02:50.639 --> 0:02:53.320 us an update on what's really going on in Chinese 0:02:53.320 --> 0:02:56.160 real estate. We're going to be speaking with Travis Lundie. 0:02:56.440 --> 0:03:00.799 He's an independent analyst who publishes on the smart Karmat platform, 0:03:00.840 --> 0:03:03.080 and of course we had him on the show last 0:03:03.160 --> 0:03:07.120 year to talk about China Evergrand, which has since then 0:03:07.280 --> 0:03:11.280 finally and officially defaulted on its debt. So, Travis, thank 0:03:11.280 --> 0:03:13.839 you so much for coming back on the show. Thank 0:03:13.880 --> 0:03:16.240 you for having me. I'm trying to think where to 0:03:16.320 --> 0:03:19.320 begin because there has been so much going on in 0:03:19.360 --> 0:03:21.960 the space, But maybe just to start, you can give 0:03:22.040 --> 0:03:25.959 us an update on I guess, the current situation around 0:03:26.120 --> 0:03:29.560 Chinese property developers. What have we seen since we last 0:03:29.560 --> 0:03:34.640 spoke to you and since Evergrand actually defaulted. Okay, if 0:03:34.680 --> 0:03:37.240 we take it back a little bit further back to 0:03:37.280 --> 0:03:39.520 when we last spoke, and I can I think we 0:03:39.560 --> 0:03:43.360 can use ever Grand as a kind of case study 0:03:43.400 --> 0:03:46.960 for the way other developers have also seen deterioration, and 0:03:47.000 --> 0:03:50.760 because ever Grand is so large, it effectively encompasses the 0:03:50.840 --> 0:03:54.120 size of several other smaller developers who might default. The 0:03:54.200 --> 0:03:57.640 loan interest payments were not made on domestic bank loans. 0:03:57.640 --> 0:04:01.440 It appears trust loan repayments were not made. Wealth management 0:04:01.440 --> 0:04:05.480 products have not been repaid at their maturity. At some 0:04:05.520 --> 0:04:08.920 point in late Q three to early q four, something 0:04:08.960 --> 0:04:11.520 like half of the projects that ever Grand was working 0:04:11.520 --> 0:04:14.680 on had been at sea work suspended. At that point, 0:04:14.720 --> 0:04:19.560 we've seen a certain amount of positioning. People are positioning 0:04:19.560 --> 0:04:22.800 for the fall. Local governments started looking at taking back land. 0:04:23.400 --> 0:04:27.520 Ever Grant was trying to reduce its its debt by 0:04:27.720 --> 0:04:33.520 delivering assets, selling assets to other developers, selling assets to 0:04:33.640 --> 0:04:40.160 local government affiliated s o ees. Basically none of that worked. Eventually, 0:04:40.480 --> 0:04:43.360 ever Grand ran into problems paying its coupons on its 0:04:43.400 --> 0:04:46.159 offshore debt, paid a bunch of them late. It got 0:04:46.160 --> 0:04:49.280 an extension on a guarantee on a private debt which 0:04:49.360 --> 0:04:53.159 people did not know existed. That extension required delivery of 0:04:53.160 --> 0:04:57.400 certain documentation from a municipal government. That documentation didn't derive. 0:04:58.120 --> 0:05:01.360 The bond holders demanded repayment. That came with the great 0:05:01.440 --> 0:05:03.400 end of a grace period of another coupon, and you know, 0:05:03.520 --> 0:05:05.680 Evergrhanad just tossed in the towel and said, you know, 0:05:05.680 --> 0:05:08.440 we're not paying. That triggered an event of default on 0:05:08.480 --> 0:05:11.640 the on the offshore notes, all of them. Uh. And 0:05:11.800 --> 0:05:13.960 since that time it hasn't made any sense to pay 0:05:14.000 --> 0:05:17.279 any of the other coupons or redemptions on the offshore notes. 0:05:17.480 --> 0:05:20.480 And so you know, people are looking at these and saying, woo, 0:05:20.560 --> 0:05:23.039 they didn't pay that coupon, or maybe they're not going 0:05:23.080 --> 0:05:24.880 to pay that redemption at the end of this month. 0:05:25.160 --> 0:05:27.279 Well they're not going to. They can't simply decide to 0:05:27.279 --> 0:05:29.760 start repaying these things without paying back the other ones. 0:05:30.720 --> 0:05:34.440 In the meantime, the onshore bonds are seeing pressure. There 0:05:34.520 --> 0:05:38.840 was an effort to extend the repayment on some onshore 0:05:38.880 --> 0:05:42.320 bonds last week that was successful, but it's not sure 0:05:42.360 --> 0:05:46.560 how much of that was effectively prodded by local authorities. 0:05:46.600 --> 0:05:50.320 You either extend or you get nothing. When the Jumble 0:05:50.400 --> 0:05:53.680 Fortune redemption missed, that triggered you know, considerable upset in 0:05:53.720 --> 0:05:57.520 local circles, and a working group was dispatched and they 0:05:57.520 --> 0:06:00.360 set up a new risk management committee. That work group 0:06:00.400 --> 0:06:02.599 is very similar to the way H and A group 0:06:02.680 --> 0:06:08.040 was resolved in February two after years of debt issues 0:06:08.120 --> 0:06:11.839 and over investment which had gone sour and some you know, 0:06:11.920 --> 0:06:15.719 likelihood of missed payments in Q one two, the high 0:06:15.720 --> 0:06:17.919 non government sent in a working group. And this is 0:06:18.000 --> 0:06:20.320 you know H and A says, we will request you 0:06:20.400 --> 0:06:22.679 to send in the working group, and that's the official story. 0:06:22.720 --> 0:06:25.400 What really happens is, you know, the local government says, 0:06:25.839 --> 0:06:27.800 we would like you to request us to send in 0:06:27.800 --> 0:06:30.440 a working group, and they say yes, sir, So they 0:06:30.440 --> 0:06:33.279 send in a working group, and that working group chairman 0:06:33.279 --> 0:06:35.480 became the new chairman of the company. And the goal 0:06:35.640 --> 0:06:38.960 was quote to diffuse risks and safeguard the interests of 0:06:38.960 --> 0:06:41.960 all parties. And so that's the risk management part. And 0:06:42.040 --> 0:06:44.040 given that the local government in every grand's case has 0:06:44.080 --> 0:06:47.279 been tasked with sorting out all of the claims, financial 0:06:47.360 --> 0:06:51.680 and otherwise, its involvement is key to safeguard the interests 0:06:51.720 --> 0:06:54.200 of all the parties. And so if we look at 0:06:54.200 --> 0:06:56.400 the H n A process, we can look and we 0:06:56.440 --> 0:06:59.240 can see that there's a possibility that EVERGRAND turns out 0:06:59.320 --> 0:07:02.560 roughly the same way. H and A basically went into 0:07:02.560 --> 0:07:06.440 a kind of suspended animation. Bond holders didn't know what 0:07:06.480 --> 0:07:10.600 was going on. Non strategic assets which could be sold 0:07:10.880 --> 0:07:13.960 were sold to non local parties that raised a little 0:07:13.960 --> 0:07:17.680 bit of cash. The local operating businesses continued running and 0:07:17.840 --> 0:07:21.000 you know, at a negative earnings rate. The working groups 0:07:21.040 --> 0:07:23.640 spent basically a year figuring out where all the bodies 0:07:23.640 --> 0:07:26.920 were buried and what needed to be done. And in 0:07:27.000 --> 0:07:31.040 February two thousand twenty one, the company filed for bankruptcy. 0:07:31.440 --> 0:07:34.000 That got the court officially involved in the working group. 0:07:34.040 --> 0:07:36.720 Managed company could then solicit sponsors to take over the 0:07:36.760 --> 0:07:40.520 businesses and the assets, and they took all three hundred 0:07:41.200 --> 0:07:44.000 assets and and companies bunched them into a group of 0:07:44.040 --> 0:07:47.240 four and then said please bid. And it was the 0:07:47.320 --> 0:07:52.320 bids which were presented which proposed breakdowns of how much 0:07:52.400 --> 0:07:56.880 each of the creditor classes got. And that meant that 0:07:56.960 --> 0:08:00.400 you know, people who were who didn't have money, they 0:08:00.400 --> 0:08:03.119 were waiting to get repaid. It took them a long 0:08:03.200 --> 0:08:05.760 time to get repaid. And I think that ever Grand 0:08:05.840 --> 0:08:08.320 is going to be in much the same situation. Instead 0:08:08.320 --> 0:08:11.040 of three units, it has you know, a thousand units. 0:08:11.760 --> 0:08:14.520 Right now, everyone is quote unquote cooperating U and the 0:08:14.560 --> 0:08:17.040 highest goal here is to just keep on working, building, 0:08:17.120 --> 0:08:19.600 finishing projects and delivering them. The home buyers, you know, 0:08:19.640 --> 0:08:23.640 homebuyers and local governments are the protected classes here. Importantly, 0:08:23.680 --> 0:08:26.560 they're also the way that cash eventually gets back to 0:08:26.600 --> 0:08:30.840 the Onshore Real Estate parent company. So without these projects continuing, 0:08:31.200 --> 0:08:35.200 there's no resolution on the other end. That progress rate 0:08:35.240 --> 0:08:38.040 is now up into the nineties, and there will be 0:08:38.160 --> 0:08:40.600 positive news because every grand will say, you know, we're 0:08:40.600 --> 0:08:43.480 doing this, we're doing that, and the negative news simply 0:08:43.480 --> 0:08:48.600 doesn't come out. So Tracy said something interesting in the beginning, 0:08:48.760 --> 0:08:50.600 and it's something to the extent of like, well, what 0:08:50.760 --> 0:08:54.320 is the Chinese government attempting to achieve here? What is 0:08:54.360 --> 0:08:57.840 the endgame? Which to me raising the question of like, okay, 0:08:57.840 --> 0:09:00.000 how much of what we've seen over the last several 0:09:00.120 --> 0:09:04.000 months is the result of some policy aim versus some 0:09:04.080 --> 0:09:08.080 sort of unintended consequence of something that was not the 0:09:08.200 --> 0:09:12.080 aim at all. And so when you look at what's transpired, 0:09:12.240 --> 0:09:15.360 and you know, as we haven't had anything like Lehman, 0:09:15.440 --> 0:09:17.880 but it's certainly been messy. There's certainly been a lot 0:09:17.920 --> 0:09:21.559 of pressure on the protected groups of homebuyers and local governments. 0:09:21.880 --> 0:09:24.520 How much was this a goal versus how much was 0:09:24.600 --> 0:09:28.320 this a unfortunate side effect of aiming to achieve something else. 0:09:29.360 --> 0:09:33.160 That's a really good question. I'm not sure I have 0:09:33.200 --> 0:09:35.640 a good answer for that one, and if I did, 0:09:35.679 --> 0:09:38.000 I'm not sure I could say it. It's pretty clear 0:09:38.320 --> 0:09:41.720 this was not a policy or a group of policies 0:09:41.760 --> 0:09:45.840 which happened out of the blue. The p POC started 0:09:45.840 --> 0:09:51.240 cracking down on excessive debt at financialized developers, which included 0:09:51.240 --> 0:09:54.800 every grand at that time, in two thousand eighteen, they 0:09:54.840 --> 0:09:56.720 warned them. At the beginning of two thousand eighteen, they 0:09:56.800 --> 0:09:58.240 labeled them in a report. At the end of two 0:09:58.240 --> 0:10:02.000 thousand eighteen, the Chairman Hua went on the tape saying 0:10:02.000 --> 0:10:04.240 we will reduce debt. He went on the tape again 0:10:04.800 --> 0:10:07.280 in early two thousand twenties saying he would reduce debt 0:10:07.360 --> 0:10:10.240 drastically in the next three years. This was a plan, 0:10:10.760 --> 0:10:13.559 and it only came to the August two thousand twenty 0:10:13.600 --> 0:10:18.000 when the p POC, the Housing and Urban Development Ministry 0:10:18.320 --> 0:10:21.400 came out and said you twelve, we need you to 0:10:21.720 --> 0:10:24.000 abide by these new rules. These are the three red lines. 0:10:24.600 --> 0:10:26.559 And it never became official policy as far as I 0:10:26.559 --> 0:10:28.720 can tell, but everyone knows what they are. And it 0:10:28.800 --> 0:10:32.880 meant that, you know, those who were triggering two to 0:10:33.000 --> 0:10:35.400 three of those red lines, and ever grand triggered all three, 0:10:35.880 --> 0:10:40.280 there was simply nothing to do other than shrink. If 0:10:40.320 --> 0:10:44.280 you're running a business and you're growing top line and 0:10:45.200 --> 0:10:47.960 you have a hundred and you're financing at ten, that 0:10:48.040 --> 0:10:50.840 means in order to roll your financing next year, you 0:10:50.880 --> 0:10:53.600 need to roll a hundred and ten. Well, if you've 0:10:53.640 --> 0:10:57.560 got new new assets and new obligations because you bought 0:10:57.640 --> 0:11:00.760 some land bank last year and you've got an increased 0:11:00.800 --> 0:11:03.800 number of projects this year, well, you know, to start 0:11:03.800 --> 0:11:06.079 a project, you pay off the government with the local 0:11:06.120 --> 0:11:09.120 government with your payment for the land. You have to 0:11:09.160 --> 0:11:11.319 go get debt to do that. So you go get 0:11:11.360 --> 0:11:14.280 some debt, you pay the land, you start pre selling, 0:11:14.360 --> 0:11:16.080 You get some cash in the door. Some of that 0:11:16.160 --> 0:11:19.040 has to stay in escrow, but that debt to pay 0:11:19.080 --> 0:11:21.200 off the land at the start of a building is 0:11:21.520 --> 0:11:23.600 a kind of a bridge. You have to increase the 0:11:23.760 --> 0:11:27.240 capacity for that bridge. If you can't have any ability 0:11:27.240 --> 0:11:31.640 to increase interest bearing debt, then you have to sell stuff. 0:11:32.200 --> 0:11:34.400 It's not as much as you know buying land bank, 0:11:34.559 --> 0:11:38.680 you actually have to sell stuff. And I think that 0:11:38.800 --> 0:11:40.560 the problem is that if you do that for the 0:11:40.600 --> 0:11:44.400 twelve largest developers, well that's going to trickle down. It's 0:11:44.440 --> 0:11:47.440 going to hurt everybody. This was not something which was 0:11:48.200 --> 0:11:53.120 an accident. There was a real design to reduce over 0:11:53.240 --> 0:11:57.600 leverage at developers. There has been efforts to reduce upward 0:11:57.640 --> 0:12:00.400 price pressure in a bunch of markets. There have been 0:12:00.440 --> 0:12:04.960 efforts to reduce excessive lending against property. They've put pressure 0:12:04.960 --> 0:12:07.160 on the banks for years to keep the cap at 0:12:07.160 --> 0:12:10.959 the allocated level or below. They get really nasty when 0:12:10.960 --> 0:12:14.079 a bank goes anywhere near that level. So they've been 0:12:14.120 --> 0:12:17.720 reducing the leverage available in all of the domains until 0:12:17.760 --> 0:12:19.800 they got to developers. Then they finally pushed it on 0:12:19.840 --> 0:12:24.320 developers too. This was not a coincidence. Now, you know, 0:12:24.360 --> 0:12:27.319 the common prosperity theme became very popular in two thousand 0:12:27.400 --> 0:12:29.559 twenty one. It existed before that. I think most of 0:12:29.600 --> 0:12:32.320 us didn't pay quite enough attention to it. But the 0:12:32.360 --> 0:12:34.720 houses are for living in, not for speculation. That was 0:12:34.760 --> 0:12:36.520 around for even more and we you know, we didn't 0:12:36.559 --> 0:12:40.320 pay attention to that either. I think that the the 0:12:40.400 --> 0:12:45.160 government has spent a great deal of effort to try 0:12:45.200 --> 0:12:49.679 and close off avenues of rescue. You know, the banks 0:12:50.000 --> 0:12:53.600 may find it tough to increase lending because they are 0:12:53.640 --> 0:12:57.040 at their limits. The central government made it us a 0:12:57.120 --> 0:13:02.480 part of the fifty five year Plan to increase development 0:13:02.679 --> 0:13:09.560 and financing for local and regional rejuvenation and urbanization. And 0:13:09.679 --> 0:13:13.160 this was basically, you know, them putting money into the 0:13:13.200 --> 0:13:19.800 pot for growing the equality of of real estate access 0:13:19.880 --> 0:13:23.440 to people who didn't have that access before. However, that's 0:13:23.440 --> 0:13:27.200 a very small part of the country. It's not small 0:13:27.240 --> 0:13:30.400 in terms of people. But the land price starts lower, 0:13:30.880 --> 0:13:34.400 the aspirations are lower, the total nominal amount spent is 0:13:34.440 --> 0:13:38.760 lower um if you increase that by but you decrease 0:13:38.840 --> 0:13:43.240 the the major urban centers by is a very large 0:13:43.360 --> 0:13:45.760 net drop. Now, the other thing is that this is 0:13:45.840 --> 0:13:48.080 this is a big part of the economy, right so 0:13:48.120 --> 0:13:53.080 it's it's some odd percent of the economy residential real 0:13:53.200 --> 0:13:57.120 estate is and that means that if you dampen its growth, 0:13:57.200 --> 0:14:00.360 you dampen the growth of the overall economy. And another 0:14:00.400 --> 0:14:04.319 part pivot of the five year Plan was they were 0:14:04.360 --> 0:14:09.319 going to increase quality growth and decrease quantity of growth 0:14:09.440 --> 0:14:13.720 or emphasize quality versus quantity. That means that they were 0:14:13.720 --> 0:14:17.240 telling you very clearly, the stuff that we did before 0:14:17.320 --> 0:14:18.800 to get a high growth rate, we're not going to 0:14:18.880 --> 0:14:22.560 do it anymore. That's a policy decision. So I think 0:14:22.560 --> 0:14:26.120 there's there's a fair bit of effort put into changing 0:14:26.400 --> 0:14:29.400 the direction here. I think also that it's important to 0:14:29.440 --> 0:14:31.360 notice that real estate is considered to be like the 0:14:31.440 --> 0:14:34.920 driver of inequality. So if you want to decrease inequality, 0:14:35.120 --> 0:14:37.640 you've got to decrease the inequality embedded in real estate. 0:14:54.960 --> 0:14:57.240 So I want to get into how real estate actually 0:14:57.520 --> 0:15:01.680 impacts all the various parts of the economy, including things 0:15:01.720 --> 0:15:05.360 like local government financing. But before we do, you know, 0:15:05.440 --> 0:15:09.120 you just described the response to the redlines policy, which 0:15:09.200 --> 0:15:12.720 was basically I mean, it wasn't nothing. But the only 0:15:12.760 --> 0:15:16.800 thing that developers could really do is try to shrink 0:15:17.280 --> 0:15:21.680 sell off assets. I'm wondering, you know, even if they 0:15:21.720 --> 0:15:25.200 sell off assets, they still have these massive liabilities that 0:15:25.240 --> 0:15:28.360 they need to fund somehow. And given all the uncertainty 0:15:28.400 --> 0:15:31.080 in the market, it seems very unlikely that a lot 0:15:31.120 --> 0:15:34.480 of foreign investors are going to step into buy those 0:15:34.520 --> 0:15:38.520 dollar bonds. So I'm curious, how are real estate developers 0:15:38.640 --> 0:15:43.920 actually funding themselves right now. I ever, Grant spent much 0:15:43.960 --> 0:15:50.600 of two thousand one extending the terms on its non 0:15:50.720 --> 0:15:53.520 interest bearing liabilities. So if you look at the interest 0:15:53.560 --> 0:15:57.200 bearing liabilities, they actually shrunk from December two thousand twenty 0:15:57.240 --> 0:16:01.400 to June two one. If you look at the the 0:16:01.560 --> 0:16:08.840 commercial bills or the trade payables, those increased. So the 0:16:09.000 --> 0:16:13.680 debt numbers, which was the intersparing liabilities portion, that actually shrunk, 0:16:13.840 --> 0:16:17.040 and they made their target of shrinking debt by a 0:16:17.120 --> 0:16:21.840 hundred and fifty billion RMB. But that's that's doesn't help anything. 0:16:22.120 --> 0:16:24.640 If you put more suppliers on the hook and they 0:16:24.640 --> 0:16:28.360 stopped working for you, then you can't finish your project, 0:16:28.960 --> 0:16:32.000 and that's what happened in the second half of two 0:16:33.200 --> 0:16:37.040 If we ask ourselves what can replace the foreign funding, 0:16:37.080 --> 0:16:41.080 that's a good question so far. I think in this 0:16:41.720 --> 0:16:45.479 year there's something like thirty six billion dollars of redemptions 0:16:45.600 --> 0:16:50.480 of the US dollar debt for Chinese developers. That's a 0:16:50.520 --> 0:16:52.520 fair bit. That means that that money has got to 0:16:52.600 --> 0:16:55.600 come from someplace else. It's not clear to me that 0:16:55.680 --> 0:16:59.520 banks will want to increase there lending in order to 0:16:59.560 --> 0:17:03.840 repay they're already under pressure to not increase. If you 0:17:03.880 --> 0:17:06.080 look at what the n d r C said as 0:17:06.119 --> 0:17:10.160 a side note to the four five year plan last year, 0:17:11.520 --> 0:17:13.440 it was very clear they were going to crack down 0:17:13.680 --> 0:17:17.880 on the unconstrained growth of local government debt and hidden debt, 0:17:19.080 --> 0:17:25.400 and they were going to emphasize prudent fiscal rotation rather 0:17:25.520 --> 0:17:31.479 than monetary easing in the sector and in the growth 0:17:31.520 --> 0:17:35.840 mix of the economy. And Lika Shine came out and 0:17:35.880 --> 0:17:38.959 said six people have been expecting a higher number, had 0:17:38.960 --> 0:17:40.720 always been a higher number, and he came out with 0:17:40.760 --> 0:17:43.879 a lower GDP target for two thow it ends up 0:17:43.920 --> 0:17:47.040 higher than that according to the stats, but the willingness 0:17:47.040 --> 0:17:50.879 to accept a lower target was seen as proof that 0:17:51.440 --> 0:17:55.320 there was a goal to to crack down on on 0:17:55.520 --> 0:17:58.520 the excesses of the quantity of growth versus quality of 0:17:58.520 --> 0:18:02.600 growth problem. In this case, it's tough to see who 0:18:02.640 --> 0:18:04.880 picks up the slack. If you look at foreign markets, 0:18:05.480 --> 0:18:09.120 you know, the European markets or US markets, when the 0:18:09.240 --> 0:18:14.240 end user stops buying, usually it comes out to longer, 0:18:15.480 --> 0:18:19.359 more patient money buying at a discount. Oftentimes that's some 0:18:19.440 --> 0:18:23.240 kind of private equity venture where people pull their funds together, 0:18:23.640 --> 0:18:27.520 either incorporated or in a very professional fund buy the 0:18:27.600 --> 0:18:30.199 assets and rent them out and hope that they can 0:18:30.240 --> 0:18:32.320 wait for five years and sell them at a at 0:18:32.320 --> 0:18:37.400 a markup. In August of two one, the government basically 0:18:37.560 --> 0:18:43.359 ordered the entity which approves funds to stop approving private 0:18:43.359 --> 0:18:47.000 equity funds in the residential real estate market because obviously 0:18:47.800 --> 0:18:52.200 housing is for living in, not for speculation, and that 0:18:52.280 --> 0:18:58.639 means that you won't see non developer companies coming in 0:18:58.680 --> 0:19:02.720 to buy these projects unless they can convince people that 0:19:03.560 --> 0:19:06.080 the project which they buy is for the betterment of 0:19:06.080 --> 0:19:09.919 the company. Maybe they buy a project and develop an 0:19:09.960 --> 0:19:14.040 asset and turn it into dormitories or something like that, 0:19:14.119 --> 0:19:15.919 and they can convince the local government that it's the 0:19:15.920 --> 0:19:18.560 appropriate thing to do to further, you know, the development 0:19:18.560 --> 0:19:21.800 of the local economy. But it's basically going to come 0:19:21.800 --> 0:19:26.720 down to s O s and s OE developers financing 0:19:26.880 --> 0:19:31.760 the purchases of assets from troubled developers, and the other 0:19:32.040 --> 0:19:34.080 place is going to have to be, you know, end 0:19:34.160 --> 0:19:36.120 users are going to have to step up and right now, 0:19:36.160 --> 0:19:39.080 you know, for the longest time, China has had a 0:19:39.119 --> 0:19:42.679 real estate market which was characterized by prices go up 0:19:42.680 --> 0:19:44.840 and demand goes up, prices go down, demand goes down. 0:19:45.200 --> 0:19:46.879 It's a combination of a gift and good and a 0:19:46.920 --> 0:19:50.199 Veblin good, depending on whether your status is housing as 0:19:50.240 --> 0:19:53.320 a staple or housing is a luxury. In this case, 0:19:53.840 --> 0:19:57.240 the government has warned, you know, pretty clearly, we don't 0:19:57.240 --> 0:19:59.959 want you to speculate. So there goes the Veblin good. 0:20:00.680 --> 0:20:04.359 They've introduced the concept of a property tax, and the 0:20:04.400 --> 0:20:08.880 property tax means that everybody's ownership gets registered. There are 0:20:08.920 --> 0:20:11.119 a whole bunch of people out there who don't want 0:20:11.320 --> 0:20:14.840 to be known as the owner of five different properties. 0:20:15.800 --> 0:20:19.080 And if you're if you're a communist party cadre in 0:20:19.240 --> 0:20:23.639 some regional city where you you purchased a bunch of 0:20:23.680 --> 0:20:27.840 properties at a very low price, and now you're the 0:20:27.840 --> 0:20:30.000 owner of those properties, and it's really great, and you 0:20:30.040 --> 0:20:34.320 are independently wealthy because you, your dog, your three year 0:20:34.320 --> 0:20:38.240 old daughter, they all own properties. You don't want to 0:20:38.520 --> 0:20:40.480 have the property tax come in and suddenly have to 0:20:40.520 --> 0:20:42.720 figure out what to do. And if that happens, then 0:20:42.840 --> 0:20:47.960 that actually creates, you know, another problem. Currently the developers 0:20:48.000 --> 0:20:51.040 aren't selling as many properties as they want to, and 0:20:51.320 --> 0:20:57.120 if luxury buyers and savings buyers, investment buyers can't buy 0:20:57.240 --> 0:21:01.399 multiple properties anymore because of a they want to discourage speculation. 0:21:01.800 --> 0:21:05.520 Then that reduces the total you know, new home sales 0:21:06.000 --> 0:21:09.879 and a property tax would invite increased secondary home sales. 0:21:10.960 --> 0:21:14.800 That's not a great thing for the market, and it's 0:21:14.840 --> 0:21:17.760 honestly not a great thing for local governments because local 0:21:17.800 --> 0:21:21.800 governments make their not by selling land to new property development. 0:21:22.359 --> 0:21:27.280 And if if new property development stops and the rotation 0:21:27.320 --> 0:21:30.879 comes from secondary property market where you know, must must 0:21:30.880 --> 0:21:35.240 sell holders transfer to new people, well the local government 0:21:35.240 --> 0:21:37.480 doesn't take a cut of that. So it's not sure 0:21:37.480 --> 0:21:40.400 where all this money's gonna come from. It's so it's 0:21:40.400 --> 0:21:43.639 so interesting. We just did an episode recently on the 0:21:43.720 --> 0:21:46.960 lack of inventory in the US housing market and this 0:21:47.080 --> 0:21:49.960 sort of rise of small landlords, people who might own 0:21:50.080 --> 0:21:52.760 one to three or four homes, and the same issue 0:21:52.800 --> 0:21:55.880 of like in states, California being the big one where 0:21:55.880 --> 0:21:58.240 there isn't much of a tax on property, you just 0:21:58.280 --> 0:22:02.160 get incentivized to hold and how placed, whether it's higher 0:22:02.160 --> 0:22:04.760 taxes that match the value of the home, you sort 0:22:04.760 --> 0:22:09.159 of create that churn and greater inventory. So it's interesting 0:22:09.200 --> 0:22:11.280 to hear the same dynamic. I mean, it makes sense, 0:22:11.400 --> 0:22:13.639 but it's interesting to hear the same dynamic in China. 0:22:14.080 --> 0:22:17.320 So that I wanted to focus on though, is you know, 0:22:17.320 --> 0:22:19.360 it seems to me when we talk about like debt, 0:22:20.000 --> 0:22:22.320 you know, there's sort of like the financial debt and 0:22:22.359 --> 0:22:25.000 the real debt and of course the financial data, the 0:22:25.040 --> 0:22:28.600 bonds and the various payments that these companies have to make, 0:22:28.800 --> 0:22:31.280 and then the real debt is of course the housing 0:22:31.400 --> 0:22:34.320 units that the companies owe to people who have put 0:22:34.320 --> 0:22:36.400 down a down payment, and it's a very big deal 0:22:36.400 --> 0:22:40.000 if those aren't delivered in a timely manner. Talk about 0:22:40.000 --> 0:22:43.119 the connection, like, what is it that has made the 0:22:43.200 --> 0:22:47.800 actual like process of creating new units, creating new homes? 0:22:48.119 --> 0:22:51.480 What caused these sort of like the physical process to 0:22:51.640 --> 0:22:54.480 slow down such that the real debt has been difficult 0:22:54.840 --> 0:22:59.040 for some of these developers to fulfill. Well, that comes 0:22:59.080 --> 0:23:02.120 down to a financial debt actually, I mean the process 0:23:02.160 --> 0:23:05.080 basically is developer says, I got a project, I want 0:23:05.080 --> 0:23:07.080 to go bid for this land. He bids for the land. 0:23:07.119 --> 0:23:10.160 He doesn't have to pay for it usually on day one. Instead, 0:23:10.160 --> 0:23:12.879 he pays for it in a year, or he's got 0:23:12.920 --> 0:23:15.720 a time limit says you must develop this within three years, 0:23:15.760 --> 0:23:17.639 so you know, two years and a half later he 0:23:17.720 --> 0:23:21.879 goes and starts developing. And developing means that they probably 0:23:21.880 --> 0:23:25.679 have to break ground and put a foundation in. There 0:23:25.680 --> 0:23:28.880 are different definitions depending on the different contract the developer 0:23:28.920 --> 0:23:31.080 signs with the local government. When the local government sells 0:23:31.080 --> 0:23:34.280 the land, however, you know, land prices go up ten 0:23:34.280 --> 0:23:37.879 percent a year. If you don't have to pay until 0:23:38.080 --> 0:23:40.760 year two and a half, you can promise to pay 0:23:40.800 --> 0:23:44.840 a hundred, and land prices go up, you know, ten 0:23:44.880 --> 0:23:47.600 percent a year, let's say, and in year two and 0:23:47.640 --> 0:23:49.399