Drawing Near to Default

NYT. Country Garden, a Chinese real estate giant, has lost billions and racked up $200 billion in unpaid obligations (we’re talking about a million flats in hundreds of cities). There are many bankrupt developers in China’s property sector, but this default will only be the latest in a long line of market downturns. Three years after China emerged from a paralyzing scenario, the country’s leaders urgently need to get the economy moving again. . In its place, the economy is growing slowly, home prices are dropping, people are spending less, and confidence among both consumers and businesses is on the decline. All worries center on the fact that Country Garden’s troubles are spreading throughout the financial markets, which will thwart any real estate industry recovery and compound the damage already done to the economy.

What is the scale of the problem?

• Concerns are escalating among markets, investors, and potential homebuyers. By early August, Country Garden had already missed two interest payments on its loans. The critical deadline looms in early September, after the 30-day grace period, when the company must either make payments or negotiate for an extension with creditors. Failure to do so would result in a default, which could severely impact the company’s ability to secure new funding. The Hong Kong stock price of Country Garden recently plummeted below $1. The first-half results for the year revealed a projected loss of up to $7.6 billion for CG.
• Experts argue that even if there is continued demand for apartments from CG, it’s unlikely to bridge the substantial financial shortfall. Furthermore, the prospect of purchasing the property from a company struggling to complete its projects is unappealing. These concerns raise parallels with the collapse of Chinese Evergrande in 2021, which triggered global market turmoil. The potential default of Country Garden could have an even more pronounced impact due to its scale. As the situation deteriorates, crucial questions arise: How will the government respond? What will be the repercussions for the Chinese economy if major developers like Country Garden fail to meet their financial obligations to suppliers and workers? Notably, Gavekal Research estimates that the accumulated outstanding debts of Chinese private developers amount to a staggering $390 billion.

What I’d like to say is this…

• Within the realm of the “wealth effect” economy, individuals find themselves both thriving and suffering as this economic paradigm undergoes a reversal, a shift that’s currently unfolding. In China, the real estate sector has plummeted, carrying away a substantial portion of middle-class prosperity. This serves as yet another indication that the global economy, meticulously constructed over the past three decades, is unsustainable like a Ponzi scheme.
• We should keep in mind that the U.S. is facing the same problem. The lurking threat to the banking sector persists, compounded by the distress in the commercial real estate sphere—where rampant construction occurred amid remarkably low interest rates. The exacerbation of the problem is further fueled by diminished demand.
• There’s an underlying sense that the point of no return is on the horizon, regardless of the exact timing being uncertain. However, that critical juncture seems to be approaching rapidly. Germany, which once stood as Europe’s economic powerhouse, is experiencing a decline. Concurrently, China is grappling with escalating challenges, a global debt crisis casts a shadow, the U.S. is contending with mounting debt, the war persists in Ukraine, a transition to an era characterized by higher interest rates is underway, and the issues of education and unemployment persist. Moreover, the inexorable rise of AI is reshaping the landscape in unprecedented ways. All these intricate transformations are unfolding simultaneously, at this very moment. Nothing will change until everything changes.