The Ferocious Rise and Quiet Struggle of China’s Country Garden

I lived and worked near their headquarters and rented a villa from their property management company. Top notch crooks, took my deposit, never fixed a thing, and constantly charged arbitrary “fees”. I shouldn’t feel happy that Country Garden is in turmoil but I do smirk.

jesus...asianometry in beast mode lately

This was a topic briefly covered in my Econ class in university -- Where do your citizens park their wealth? And what consequence does that have? * US - middle class wealth is split between housing and retirement fund (stocks and bonds). This means US corporations have access to the 2nd part. So in effect, those wealth is helping private sector growth. * China - most of the middle class wealth is stored in housing, which has no value to private sectors outside of real estate. This also causes Chinese companies to seek funding elsewhere. This was an undergrad Econ class, so we didn't go into that much detail, but I am sure there are deeper studies on it.

Just came back from China attending a number of construction trade shows in Beijing, Shanghai and Guangzhou (all happens in March). The shows are smaller this year than previous years (even pre-covid), there is a sense of doom among some of them, espceially in the Aluminium window indusry, which had discussion forums on "how to survive the current climate".

I was initially worried seeing it was a 30+ minute video, but wow I never even paused that this was really insightful

I live at Phoenix country garden GZ, since 2008. And my wife is from Shunde, this little town that must have more Porshe and Mercedes than the whole of Germany. Really funny to hear about places you know.

No one can walk away from a Chinese mortgage although the pre-sold building is unfinished, or even not started at all. You actually start paying for the mortgage before the building project commences. According to Chinese laws, the mortgage is your business with the bank, whereas the house is your business with the builder. The bank doesn't care about a dodgy builder and you have to pay the mortgage regardless. Only death can cease your mortgage.

My mom bought an apartment from them in the early years. It is not bad. The security actually check everyone when the enter the property. This is actually pretty rare in china at that time. It has school and even has a small Chinese hospital in it, the reason my mom bought it.

This looks like a peculiarly Chinese way to replay the Japanese real estate crash. Having customers effectively finance the projects only moves the credit risk even more acute.

This is a nice outsider's overview on this clusterfck. However, your two videos on this topic are missing a lot of critical details on this crazy up and down between 2014-2022. This wild ride was made possible by the red-hot China's offshore USD bond market while equity/stock played only a very small role. It was hard to research given financial news media tailored to stock investors and China property evolved to mainly serving the fixed income side. To give you a sense, there were US$180Bn of offshore China property bonds defaulted in 2021-23, more than 10x more than these developers ever raised from the equity market across the past 20 years, Evergrande and Country Garden only accounted for 10-12% of it. Also another 30-40Bn of syndicated loan from HK based banks or bank branches. Couple things you might want to research more for your next video on this topic: 1) 2014 saw the first series of measures to cool the market. It set up the escrow account system that developers supposed to put the pre-sales proceeds into (this never enforced by the banks until after Evergrande defaulted in 2H2021). More importantly at that time, China banned banks to lend to developers directly for land acquisition. So from that point onward, developers sought offshore USD bond issuances and onshore shadow banking to fund land purchases, and the bond market and shadow banking market also went crazy at that time, so a lot of money was flow into these leading property firms to buy tons of land. 2) at around 2017, a second round of cooling measures came with a rumor calling for banks to only lend to the top 50 developers on construction loan, hoping to reduce exposure on those smaller and weaker developers. However, this inevitably set up a mad dash to try to grow their scale exponentially. Those ranking in top 30-50 had to double in size each year to maintain their ranking. The ranking is done by "gross proceeds" disregarding the attributable ratio, so these developers started to get creative, either forming JVs among themselves on projects and everyone count the full sales to their ranking, or they start selling minority shareholding to shadow banking players like trust products, insurance funds, etc that provide guaranteed return or put option. Effectively an equity-linkes debt instrument on these minority interest. Balance sheet began to deteriorated rapidly with many hidden debts that are not shown in the financials. More importantly, during this mad dash period, these developers are buying lands in less desirable areas that they chose to buy just to maintain its scale. These undesirable projects are mainly where we are seeing construction halt, ghost town etc nowadays. 3) The Three Red Lines was only a headline grabbing policy and looking back, it didn't really impacting the developers. The banks can't really lend to them anymore anyways so 3 Red Lines didn't really matter. What's most important around 2020 was, China already cracked down on shadow banking and already a few credit events start popping up (like China Fortune Land) and developers already needed to start desperately coming up with funds to repay these shadow banking. They bought themselves 1-2 years of extra time after securing extra financing in Hong Kong's private credit market. These private debts were not disclosed to equity shareholders nor public bond investors, containing additional terms that were not offered to public bondholders 4) The final straw on the camal was not the 3 Red Lines nor Evergrande, but rather two self-fulfilling prophecy and self-policing risk management that triggered the avalanche. Following Evergrande's default, China regulators wanted to find out whether all the money sitting in the escrow accounts across the banking system is sufficient for Evergrande to finish all the projects under construction. Because as long as all the projects can be delivered, Evergrande can just wind down and who's care about foreign bondholders losing US$ bonds. This opened up a Pandora's box. Not just Evergrande, everyone, I literally mean every developers, do not put enough money in the escrow account despite the policy was introduced in 2014. The banks knowingly allowing the developers to take out money from escrow accounts for their next projects. With rumors saying regulators want to penalize the banks and investigate what is the exact shortfall in escrow account in each bank, it set up a mad rush for banks to freeze up developers bank accounts to fill the escrow account holes. This strain in liquidity triggered Moody's S&P and Fitch, these rating agencies to start downgrading offshore bonds. Most HK private credit bonds carry a put option clause when the developers got downgraded, forcing them to repay immediately. These two basically vanished all the cash balance and liquidity all these developers had. An avalanche of developers defaulting in 2022, with a few "better" ones dragged onto and defaulting 2023. There were only a few left standing right now only because they were conservative during that 2014-2021 and ironically were the one being criticizing for growing too slow during that period For example, cifi grew 10x in scale between 2014-2021 and died in 2022, country garden onlh grew 6x and died in 2023. If one play attention to the month-to-month property sales numbers on each developer, it was the property developers who defaulted first (or news of them at risk of defaulting hitting mass media) that led to a collapse of this developer's property sales, instead of the common narrative that a collapse of property sales triggering these developers to default. (The latter was the common excuses company and investors made to blame the govt policy instead of themselves enabling the crazy madness since 2014) I hope the above will help your research.

"why no harvard..." True asian dad moment 😆

That final conclusion, "the Chinese real estate industry isn't going anywhere" was a nice double entendre.

"Why no Harvard?" made me LOL.

14:51 The statement says nothing about fictional. It says that the content of the book requires partial editing, and its publication has been delayed.

13:44 So he pulled an SBF.

Using today's receipts to cover losing project debts is sometimes called riding the rolling monster. A misstep and you are eaten by the monster. More than a few take that chance, very few get out alive.

His incentives remind me of Glengarry Glen Ross

12:25 "close interaction with local government" did that intonation convey what I think it does? Thought so 👍

Asianometry maybe on a second channel or something please give a research/overview of how you research its crazy how rounded and detailed your overviews are

Property crash? - you ain't seen nothing yet. A money vacuum pump.