How much you got in loose change in your pockets, couch, or car that could help the fine folks in China? Believe me, you will help these fine folks if our congress passes that Infrastructure bill this week. Thankfully, the Federal Reserve has said they won’t raise the debt ceiling and several members from all sides of congress have said they don’t like the spending it is wanting to do. So we might have a chance at making a lot of that new bill disappear, but how do we know for sure what is in it? I remember not long ago, “Nance” uttered those long painful words from the Obamacare fiasco, “we have to vote on it to know what’s in it”. Since October 1 is the new fiscal year for the US Government, time is not in their favor since they waited to the last minute to push this ginormous kidney stone through hoping it would be rammed in quickly without anyone asking too many questions about the gaping hole it leaves behind.
So here is the short and skinny on why this is so important: Do you remember the “Housing Bubble” of 2008? Many mortgages happened that shouldn’t have because the system was rigged, but the clients didn’t know at the time. It took a few years to build up and finally it popped. Many banks, lenders, financial institutions were making money hand over fist on a raw deal that hurt many families who were just trying to make a better future. Businesses, unions, and other organizations put their money into all these funds that were promised to raise capital for construction of new homes and condos. Homes that were already on the market were fair game as well. When people bought these homes or condos (some that were never finished), they used what is called an “Adjustable Mortgage”, allowing the monthly prices to skyrocket without much notice for whatever reason these companies wanted. Anyone remember the woman who bought an 800K home in the northwest on a school bus drivers salary? That shouldn’t have happened for obvious reasons, but she did see an opportunity, or so she thought. I got conflicting reports that she was able to keep the house because she sued to mortgage company, then I heard she lost it because she didn’t read the contract. So who knows, none of my business. What I do know is that finances are in the top two reasons (statistically) for divorces and families breaking up. Needless to say, many families were hurt because or in direct result of this fiasco. Finally, these institutions suffered a little, the smaller ones became smoke and the bigger ones were left bleeding out massively before the United States Government bailed them out with BILLIONS of American taxpayer dollars. Part of the reason this was allowed to happen was because certain departments / agencies was underfunded by the government. Who handles the US budget?
Now, China has taken what happened in our “Housing Bubble” and said with a big ol’ Texas grin on their face, “hold my Yanjing”. Instead of building neighborhoods of huts and apartments, they build high-tech cities for people to move into. Purchasing the homes of their dreams in China for the average citizen. The only problem is that when you live in a communist country, the average person doesn’t have a whole lot of money. Granted, the communist leaders / lenders rained money down to those who wanted to purchase properties, but the people still didn’t have much to pay back as the contracts they signed dictated. However, a lot of the people didn’t take the bait, nor did they want to put their families at risk of being put into prisons for debt. So no, these new fancy homes and actual cities the Government funded to be built are just sitting fancy where they are, empty, and decollate literally in the middle of nowhere.
Still with me on this? Okay, good because here is the interesting part. Fast forward from a few years back, now we see several companies going down. What the mainstream news isn’t telling you is that several little investment and loan companies have already gone under. Poof, gone because they can’t afford to lose their souls and are now out of the way. The people who worked there are probably in jail selling their organs to pay the bail. This next domino is a major player in the Chinese market. Evergrande, a giant Chinese real estate development group is VERY close to collapsing. The company is currently $300 billion in debt and has warned investors that it might not be able to get out of this one without defaulting. After news spread of the company’s mounting debt, investors showed up at the company’s headquarters beginning late last week demanding money they’re owed from the firm. This is what some investment folks would refer to as “Margin Call”. Others could say this is very similar to what the Federal Reserve is going to do with the United States Government as well in the next few months.
With 200k employees and 1,300+ developments across China, Evergrande is also facing protests from homebuyers and employees who fear that the housing market will collapse as a result. In Evergrande’s implosion, some are seeing echoes of US bank Lehman Brothers’s bankruptcy back during the 2008 “Housing Bubble” that turned into what the Obama Administration liked to call a “Housing Crisis”. That company’s collapse, alone, affected economies around the world and contributed to the 2007–2008 global financial crisis. So there’s some concern that Evergrande’s condition could rattle markets elsewhere…though that hasn’t happened yet. Some might say that the Chinese Communist Government (a.k.a. CCP) will probably step in to prevent Evergrande from triggering a broader meltdown. However, if you were to look at the financial situation in China, that doesn’t quite seem to be possible without some sort of major change in their economy or worse, the possibility of war.
Now considering how the possibility of the latter is almost a 50% chance of happening in this current political climate, even via proxy with what is happening in Afghanistan, it is a pretty scary scenario either way. China has express very real concerning actions to help the Afghanistan people “eradicate terrorism in their country” (https://www.channelnewsasia.com/world/chinas-xi-urges-afghanistan-stamp-out-terrorism-vows-more-aid-2185546). Afghanistan can / would be better without the Taliban, Al Qaida, or any other terrorist group there, but what would China want in return? I can think of a few things: Lithium mining rights, Opium production, territorial expansion, Oil productions, other natural resources, and workers. All in all, that might not be beneficial to the American people or our allies. However, even if China was to do this, it would take serious money that is heavily backed right now, something that is weakening by the day. China’s public debt already stands at 270 percent of GDP, and non-performing loans have hit $466.9 Billion (https://www.scmp.com/economy/china-economy/article/3135883/china-debt-has-it-changed-2021-and-how-big-it-now). In addition to existing economic challenges, real estate giant Evergrande Group has signaled that it may default on payments owed to creditors.
Currently, the conversion is 1 USD = 6.46621 Chinese Yaun and 1 USD = 7.78198 Hong Kong Dollar. The American dollar is much lower, yes, but IMHO, this goes to why I feel that we are going to be the ones who bail out this Chinese company, Evergrande. One question that every American taxpaying citizen should be asking and that every member of congress and the Biden / Harris administration should be answering truthfully is why the “Infrastructure Bill” requiring so much money? By now you may be asking why would Americans be the ones to help bailout China? The reply I would give is “why not?” We all know that Joe Biden and several members of congress are chummy with China. So as much of an argument you could make that I could be wrong about Americans paying for this Chinese companies debt to keep them from failing, I could make that much of an argument back.
Take another step with me down the rabbit hole: Evergrande made $110 billion in sales last year and has $355 billion in assets (https://www.theepochtimes.com/evergrande-default-could-rock-chinas-entire-economy_4000625.html). In June, it failed to pay some commercial paper and the government froze a $20 million bank account. The company now owes total liabilities of $305 billion, making it the most indebted real estate developer in the world. Something else that sticks out like a nail in a tire is that the company is also the largest issuer of dollar junk bonds in Asia. Imagine that, huh? Evergrande owes money to 128 banks and over 121 non-banking institutions, not just in China, but world-wide. Consequently, the company’s stock price has dropped by 90 percent over the past 14 months, while its bonds were trading at 60 to 70 percent below par.
Eventhough Evergrande accounts for about 4% of the total Chinese real estate high-yield debt, the company’s debt is of such significant size that it may pose systemic risk to China’s banking system. Late or defaulted payments by Evergrande could cause a chain reaction of defaults across institutions. An Evergrande sell-off could drive down prices, crashing over-leveraged developers. Authorities worry that this threatens to destabilize the entire real estate sector, which comprises about 30 percent of the Chinese economy. When you consider how much of the United States debt is owned by China, that is about $1.1 Trillion Dollars (https://www.investopedia.com/articles/investing/080615/china-owns-us-debt-how-much.asp). When you add in the fact that the Chinese yuan, like the currencies of many nations, is tied to the U.S. dollar, you get a sense of China’s debt being connected to ours and if they wanted to, they could call us to pay what we owe them to cover their losses not if, but WHEN Evergrande goes down and they see other industries suffering because of it. China own about 5.2% of the United States debt. Japan comes in second with about 4.6%, but Japanese-owned debt doesn’t receive nearly as much negative attention as Chinese-owned debt, ostensibly because Japan is seen as a friendlier nation and the Japanese economy hasn’t been growing at a 7% clip year after year. The other countries that hold the most U.S. debt include the U.K., Brazil, and Ireland.
Now you may be asking yourself why China owns so much of the Unites States debt? There are two main economic reasons Chinese lenders bought up so many U.S. Treasuries bonds. The first and probably most important is that China wants its own currency, the yuan, pegged to the dollar. A currency peg is a policy in which a national government sets a specific fixed exchange rate for its currency with a foreign currency or a basket of currencies. Pegging a currency stabilizes the exchange rate between countries and doing so provides long-term predictability of exchange rates for business planning. This has been common practice for many countries ever since the Bretton Woods Conference in 1944 (https://history.state.gov/milestones/1937-1945/bretton-woods). A dollar-pegged yuan helps keep down the cost of Chinese exports, which the Chinese government believes makes it stronger in international markets. This also reduces the purchasing power of Chinese earners. Dollar-pegging adds stability to the yuan, since the dollar is still seen as one of the safest currencies in the world. The second reason the Chinese want Treasury Bonds is because they are redeemable in US dollars.
Not to add more scare to the already encroaching problem at hand, Over the past several years, China’s corporate debt to GDP ratio has been steadily increasing. In 2017, it hit a record 160 percent, up from 101 percent 10 years earlier. Chinese leader Xi Jinping has made it a priority to rein in the debt, particularly in China’s $10 trillion shadow banking sector. Local government financing vehicles (LGFV) have defaulted on many trust loans in the shadow banking system, but not on a public bond. So far, this year, 915 million of Local government financing vehicles have defaulted. This so-called hidden debt of local governments has become so pervasive that Beijing has named it a national security issue. Every day that passes, the Chinese government realizes that a complete collapse of Evergrande could cause widespread economic turmoil and even civil unrest. The future of Evergrande and the Chinese economy depends on whether or not the central authorities will allow Evergrande to go into default, leaving its creditors high and dry, or if the Chinese Communist Party will intervene in order to maintain stability.
UPDATE:
To everyone who read my post about EverGrande earlier this week and thought / said I was full of Bravo-Sierra: Friday (9/24) “China Tightens Crypto Mining Crackdown, Bans Trading” (https://www.coindesk.com/policy/2021/09/24/china-tightens-crypto-mining-crackdown-bans-trading/). In other words, no more Crypto-currency buy, selling, or trading. They just got one step closer to creating their own International Trading Crypto currency like Brazil and Venezuela. If you ban crypto entirely to clear all the other competition out of the way, all the Chinese Communist Party has to do is introduce a single Crypto-Currency for everyone in China to use. The next step would be to make it like Brazil and Venezuela when it comes to international commerce when other counties business want to purchase resources or goods. Just like Venezuala does with their oil (Petro, which is backed by Oil). In other words, no more Crypto-currency buy, selling, or trading. They just got one step closer to creating their own International Trading Crypto currency like Brazil and Venezuela. If you ban crypto entirely to clear all the other competition out of the way, all the Chinese Communist Party has to do is introduce a single Crypto-Currency for everyone in China to use.
The next step for would be to make it like Brazil and Venezuela when it comes to international commerce with other countries whose businesses want to purchase resources or goods. Just like Venezuala does with their oil (Petro, which is backed by their oil), other countries have to purchase their virtual currency just to pay for resources and goods manufactured in Brazil. Their citizens can use the normal money and the crypto-currency. Yes, the United States is also considering for a few years now to making their own digital currency, but we haven’t really pushed that idea through to make it happen as of yet. It will be interesting to see what it is backed with because one major game changer in the world economy would be if China backed their digital Yaun with Gold. Why would they do that? Because Gold hardly ever changes value. The American Dollar and other world monies do fluctuate quite a bit depending on each respective country’s economy on the world stage, but Gold is (and always has been) universal. It very rarely changes. Personally, I wish the United States Dollar was still backed by Gold because it would be worth more than oil. We should have never taken it off Gold. There is no denying that we live in interesting times, my friends. The stage is setting up for an interesting show in the fourth quarter of this year so far. November and December is about to be something to remember for sure…