China

[The_Polymath]

A “systemic credit event” according to BofA.

Xi is desperately trying to hide the extent of the damage from the collapse of the property market (like he did with Covid), but that is only going to make things worse when it comes to their economic progress (which can be tracked from the outside), as he is just building the proverbial dam higher and higher.

Chinese property woes trigger ‘dramatic shift’ into US stocks

[knoath]

@dr_t_non-fan

@Indy

What do other people think?

Did you know that in China there are fifty six cities with over a million people?

I have 49 more to visit.

[joejam]

@knoath

I have 49 more to visit.

I have 56

[knoath]

Well, given that China’s population is shrinking, maybe it’ll be less than 56 of them that you’ll need to visit when you finally get around to it.

[Indy]

@The_Polymath

Xi is desperately trying to hide the extent of the damage from the collapse of the property market (like he did with Covid), but that is only going to make things worse when it comes to their economic progress (which can be tracked from the outside), as he is just building the proverbial dam higher and higher.

This may all be true, but I don’t see that it is supported by your link. The article says that money managers are shifting money out of Chinese stocks. It implies that Xi isn’t doing enough – " But the actions have fallen short of the “bazooka” many investors think is required."

It’s interesting that

“A third of fund managers named Chinese commercial real estate as the most likely source of a ‘systemic credit event’ in the September instalment of Bank of America’s monthly poll, with the proportion more than doubling since last month to eclipse concerns over US commercial property.”
So apparently, when they asked about the most likely systemic credit event in August, the most common response was US commercial property.

[The_Polymath]

This is what I have been referring to in this thread.

Their governance is dysfunctional because they don’t trust their people unless they have known them for decades. Ideology and corruption creates huge economic inefficiencies as you have too much censorship and need to control.

I like to refer to this issue as Heisenberg’s uncertainty principle applied to political ideology: the more you try to control a complex economic system, the larger the economic inefficiencies that arise. The old USSR was a good example of this as well.

Chinese Military (PLA) has huge corruption problems

While many analysts view Xi’s anti-corruption campaigns as politically motivated, one US official said graft was endemic in the PLA, inhibiting the president’s ambitions of turning it into a force capable of tasks such as subduing Taiwan. “It [corruption] has had a profound effect on what they’re able to do, and how they do it,” the official said.

Xi is only really interested in loyalty because the only thing he truly fears is being purged himself by insiders.

loyalists to the top leadership positions and excluded rival factions — such apparent purges would become more regular, said NUS’s Wu.

Officials would compete to show their loyalty and try to expose rivals’ weaknesses, he said. In a paper on tensions between Xi’s top officials, Guoguang Wu, senior research scholar at the Center on China’s Economy and Institutions, Stanford University, said that these disputes accounted for many of China’s contradictory policies, such as trying to attract external investors while conducting national security raids on foreign consultants.

“When the supreme leader controls everything, ironically, the CCP regime becomes less stable politically and more inconsistent in terms of governance,” Wu wrote in The China Leadership Monitor magazine this month.

Then there were two: disappearance of second Chinese minister sparks speculation - Then there were two: disappearance of second Chinese minister sparks speculation | Financial Times via @FT

[knoath]

@The_Polymath

I like to refer to this issue as Heisenberg’s uncertainty principle applied to political ideology: the more you try to control a complex economic system, the larger the economic inefficiencies that arise.

I agree with what you say but perhaps it could more accurately be referred to as the observer effect.

Uncertainty principle

Historically, the uncertainty principle has been confused[8][9] with a related effect in physics, called the observer effect, which notes that measurements of certain systems cannot be made without affecting the system,

[The_Polymath]

Not sure observer effect applies as you are not simply observing an event, you are in fact applying force (momentum) to the system as well, in order to achieve a desired outcome (expectation).

In any event, I recognise its not a perfect analogy but the trend in China seems fairly clear. Xi is increasingly trying to centralise power, and the circle of influence around him is shrinking. This is having increasingly negative effects on governance at all levels.

This reminds me a lot of how the old Politburo of the USSR functioned. The members became disconnected from the country, and you ended up with poor economic outcomes because people ended up telling them what they wanted to hear (as they were afraid to be purged for not showing enough loyalty), as opposed to the actual economic reality.

[EimonGnome]

Pure speculation follows. I got no links.

It’s so curious how China can blend capitalism and communist authoritarian. They seem at odds. But real estate is pretty cool.it’s a blend of capital and regulatory approval. The key might be “controlled corruption”

As long as the bribes are flowing to the politicians and the real estate capitalists and banks are happy, it’s smooth sailing for Xi. If that goes south, hard to say what the political and social ramifications could be. So it might be a bigger crisis than meets the eye.

[The_Polymath]

I have a friend who regularly visits China for extended family reasons, and the situation regarding bribes is really off the scale.

Basically, public officials will ignore you and not do their job unless you pay them off.

A system like that is just never going to work long-term.

[Snikelfritz]

To be fair a lot of developing countries are like that, I’m looking at you India…

[The_Polymath]

Evergrande chair put under ‘mandatory measures’ on suspicion of crimes - Evergrande chair put under ‘mandatory measures’ on suspicion of crimes | Financial Times via @FT

[Actuary321]

Evergrande on Thursday said its chair, Hui Ka Yan, had been placed under “mandatory measures” on suspicion of involvement in “illegal crimes”, a sign of escalating government pressure on the Chinese developer almost two years after its default shook global markets.

I see, “illegal crimes” as opposed to the legal ones?

[The_Polymath]

This latest analysis on Chinese corruption is relevant.

How much graft is there in China’s vast bureaucracy? Quite a lot, and it rises with seniority, even though Xi Jinping’s corruption crackdown seems to have moderated things.

Estimating how much money officials make from bribes is obviously tricky, especially in a country like China, where data is patchy and bungs are so common it is sometimes referred to as “grey income”.

But in a paper just published by the NBER, Yongheng Deng of Wisconsin School of Business, Shang-Jin Wei of Columbia Business School and Jing Wu and Rongjie Zhang from Tsinghua University (!) have come up with an interesting way of doing it.

The economists looked at the administrative records of the Housing Provident Fund, a state-backed house purchase savings scheme that gave them a detailed history of the legal income of every individual in a “large Chinese city”.

They then compared the reported earnings of officials to the income implied by their house purchases. Here’s what the researchers found, with Alphaville’s emphasis below:

Our estimation indicates that during our sample period between 2006 and 2013, an average government official’s unofficial income amounts to 83% of her official income. More interestingly, we find the unofficial income (as a percentage of the official’s legal income) increases with her rank and the prerogative power of her government bureau. For example, the unofficial income of a director general of a government department (which is ranked at the zheng ju level, equivalent to the level of a mayor of most medium or small cities in the Chinese political hierarchy) is more than 424% of the official income.

In terms of the prevalence of corruption, about 13% of officials are estimated to obtain unofficial incomes, and this proportion also tends to increase with the official’s rank. For example, whereas 8% of non-official government employees take unofficial incomes, 65% of zheng ju officials — the highest-ranking officials in the sample—are likely to have unofficial incomes. Our data also find the officials tend to be paid somewhat better than their private-sector counterparts, on average, conditional on observable personal characteristics. Therefore, we reject the hypothesis that unofficial incomes are compensation for earning a low official salary in the public sector. Thus, increasing public sector pay per se may not be enough to prevent government officials from taking unofficial incomes.

Estimating Chinese corruption - Estimating Chinese corruption | Financial Times via @FT

[NormalDan]

“unofficial incomes”

[Jasper07734]

@The_Polymath

private-sector counterparts

China has a private sector?

[Maphistos_Sidekick]

@Jasper07734

China has a private sector?

Yes, a rather large one… although investment (“unofficial ownership”?) by various government entities (the PLA comes to mind) muddies the picture a bit.

[The_Polymath]

So it looks like Evergrande will be liquidated fairly soon.

That will have a huge impact on international investors (who will likely only get a few cents on the dollar back from their investment)

China is going to be economically sputtering for years to come.

Advisers to international bondholders in Evergrande, the Chinese property developer that defaulted on its debts in 2021, have warned about a potential liquidation after its restructuring plan was unexpectedly derailed last month.

Investors were on the brink of a critical vote on the plan in late September when the developer revealed in a Hong Kong stock exchange filing that it could not proceed, citing domestic regulators and an unspecified investigation into the company.

The bondholder group, which is represented by investment bank Moelis and law firm Kirkland & Ellis, criticised what they called Evergrande’s “botched efforts to obtain PRC regulatory approval”, which they said had left investors “in the dark”.

Advisers to Evergrande creditors warn of potential liquidation - Advisers to Evergrande creditors warn of potential liquidation | Financial Times via @FT

[Indy]

It added that a failure to implement the restructuring would have a “catastrophic effect on the fate of other similarly situated Chinese companies” and the “future ability for Chinese entities to raise capital from the international capital market”.

I’m wondering if this bothers Xi. Is he thinking that China no longer needs foreign capital? They can just stiff the international lenders and shuffle assets between Chinese people without any foreign interference.

[Indy]

Country Garden Caves to Debts as China’s Real Estate Crisis Worsens

On Tuesday, the company said it expected to miss the overseas debt payments despite an agreement by local creditors to delay the maturity of nine corporate bonds totaling about $2 billion in debt.

The company said “its top operational priority” was to ensure the delivery of unfinished apartments, a priority for the Chinese government. The company said it had finished a total of 420,000 units in 2023, as of the end of September.

Yep. Xi is clear about his priorities. Chinese individuals who pre-paid for units are going to get them. Other lenders are out of luck.

I wonder if he will find a way to favor people who bought for their own use vs. people who bought for investments.