[Look at China November 22, 2021]The world‘s biggest financial event may be that Evergrande’s debts have truly defaulted. This incident immediately exploded in the global financial world. At present, many well-known media around the world are reporting this incident, such as Voice of America, Financial Blog Zero Hedge, Reuters, etc. The international media believes that the Chinese version of the debt crisis has already been pulled. It’s a prelude. This scale may be as high as more than 5 trillion US dollars, much more serious than the subprime mortgage crisis in the United States that year.
So why is the international community so concerned about Evergrande’s breach of contract this time? Because the debt default of Evergrande that has been reported before means that the debt was not repaid before the grace period. If the contract is breached this time, even if the grace period ends without repayment, it is considered a substantial breach of contract. Evergrande has more than 300 billion US dollars in debt, and the entire Chinese real estate US dollar debt is more than 8 trillion US dollars. If there is a thunderstorm, its lethality may not be weaker than that of the US subprime mortgage crisis. So now, the whole world dare not underestimate China’s dollar debt problem, especially when Sony, Fantasia, Kaisa, etc. have successively defaulted. If China’s real estate collapses, the whole world will be shaken.
On November 8, the Fed’s semi-annual Financial Stability Report listed China’s real estate crisis as the third largest economic risk in the United States. Believing that China’s real estate debt default will threaten the stability of the global market and the U.S. economy and financial markets, it has expressed dual concerns about the high debt levels of Chinese companies and the way the Beijing authorities have responded to the debt crisis.
According to the report, Evergrande, the once-prosperous Chinese real estate giant, was suddenly caught in a debt crisis of US$305 billion and was unable to extricate itself. This not only caused a shock in China’s domestic financial market, but also caused panic in the global financial market. The New York Times also reported that Evergrande’s debt crisis is not an exception. At least six Chinese real estate companies have failed to pay overseas bonds on schedule in recent weeks.
The plight of Chinese real estate companies is not limited to high debts. The Beijing authorities’ regulatory measures such as tightening house construction and house purchase credit to suppress high housing prices and house hoarding speculation have also made these real estate companies worse. The Fed pointed out in the report that the regulatory measures of the Beijing authorities have begun to trigger a collective collapse of real estate developers, and these pressures may spread to a wider range of other economic sectors. “Due to the size of China’s economic and financial system, and its extensive trade links with all parts of the world, China’s financial pressure may lead to tensions in global financial markets through the deterioration of risk sentiment, posing a threat to global economic growth and affecting the United States.”
It can be seen from this that the United States is wary of China’s real estate debt. After all, Chinese real estate is currently the world‘s largest asset class, surpassing US stocks and US real estate and US bonds, and the main holders of Chinese real estate bonds are US financial institutions and investors. Once China Real Estate Group defaults on its US dollar bonds, financial institutions such as Goldman Sachs, BlackRock, Tide, etc. will all be implicated.
China’s real estate and related industries account for 30% of China’s overall GDP. As soon as the real estate industry sneezes, China’s overall economy will catch a cold. Many people around the world believe that the real estate industry is too important to China’s economic development. The Beijing authorities will definitely not let Evergrande collapse and become Lehman Brothers second, but so far, Beijing has not directly assisted Evergrande. First, China’s real estate industry has too many debts, with a scale of around US$8 trillion. China’s foreign reserves are limited, and all of them may not be saved.
Secondly, US dollar debts are all foreign debts. If China’s real estate is about to collapse, China will surely drag the world economy to bury it. I recently saw news that Goldman Sachs is still increasing its holdings of US dollar debt against the trend, saying that Goldman Sachs has been buying US dollar debt from Chinese real estate companies to increase moderate risk investment assets. This news has been hyped up in China, just as Musk praised the Beijing authorities for being “people-oriented” and criticized the US government for not paying attention to the rights and interests of ordinary people. It is just as shameless as it is for the needs of doing business in China. And Goldman Sachs spending money to buy US dollar bonds is likely to support the Beijing authorities to increase the confidence of global investors to invest in Chinese US dollar bonds. Knowing that there are risks and fooling others into investing, Wall Street financial institutions like Goldman Sachs really have no bottom line.
In addition to the damage to international financial institutions in US dollar debt, the credit creation of China’s real estate and the demand for global commodities and energy are also the biggest engines driving global economic growth. Once China’s real estate collapses, China’s financial institutions. Therefore, no matter from which aspect, the collapse of China’s real estate will collapse the world economy. This is also the main reason why the Fed lists China’s real estate debt problem as the third largest economic risk in the United States.
At present, the monetary policies of China and the United States can be said to be contrary to each other. China’s real estate is no longer working, and the previous three red lines may not be implemented. Some places such as Shenyang have begun to relax restrictions on loans and purchases, which is also causing great repercussions. Moreover, China has begun to release water to save the economy. The first is to loosen mortgages, followed by the spread of hot and sour powder (SLF) and spicy powder (MLF) to counter inflation. At the same time, the People’s Bank of China is engaged in carbon emission reduction credits and the base currency. Both have 1 trillion yuan, so many of these funds may flow to real estate. Therefore, China is now under the pressure of inflation and is releasing water to rescue the property market.
The opposite is true in the United States. The signs of hyperinflation have come out because of the explosion of inflation. It is now ready to shrink the currency to suppress inflation. The inflation in the United States in October has exploded. In October, the CPI increased by 0.9% month-on-month, and was estimated to be 0.6%, and the previous value was 0.4%; in October, the CPI increased by 6.2% year-on-year, and was estimated to be 5.8%, and the previous value was 5.4%. According to the standard before 2008, as long as the CPI exceeds 2%, the interest rate will be raised. When inflation reaches 6.2%, the interest rate of the US dollar must reach about 9%. However, the interest rate of the US dollar is basically 0. In this comparison, we know how loose the Fed’s currency is. The Fed is now setting its main goal to keep the asset bubble from bursting, while completely disregarding its most important goal: stabilizing prices. Let’s take a look at the current U.S. prices, from gasoline to rent, from supplies to daily necessities and food, basically rising substantially across the board, basically hyperinflation. The Fed still says that inflation is temporary, but it is actually making a mistake. Without raising interest rates, US inflation will get out of control!
Therefore, inflation is likely to trigger domestic political turmoil, and the Fed will certainly be forced by the political pressure of the Biden administration to speed up the pace of reducing debt purchases and even speeding up the pace of interest rate hikes. And this is the biggest risk of the world‘s second largest bubble in US stocks.
Therefore, now China is releasing water and the United States wants to collect water, but the RMB exchange rate is still relatively strong. This is due to China’s export of inflation and China’s consideration of reducing its trade deficit under pressure from the United States. But the most critical link in the middle is that the renminbi is flooded to maintain such an exchange rate, which shows that the pressure on the renminbi to be run is very high.
This depends on China’s foreign exchange control. This is the main reason why the Beijing authorities have recently restricted personnel from studying abroad and traveling, cracking down on Bitcoin, and cracking down on Internet brokerages such as Tiger Securities and Futu Securities. The US dollar is still the lifeblood of the Chinese Communist regime and will not let the common people get caught in the exodus.
Editor in charge: Yu Zhen
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