UPDATE 01/03/22 Evergrande stock: China’s property developer suspends trading in Hong Kong – CNN
While we’re shopping from Amazon (or at the mall?), ominous events are taking place in the investment world: China’s largest real estate company, Evergrande—with 200,000 employees and more than 1,300 developments in more than 280 cities–has defaulted on its $300 billion debt. This despite having real estate sales of $110 billion last year. Why is this significant? Never mind the awful consequences of our complete social shutdown—depression, suicide, drinking and drug use, reckless Covid relief and stimulus—the U.S. pension system and insurance funds are heavily invested in the collapsing Chinese real estate bubble and consequently, have lost billions. Other Western nations are in a similar bind.
Granted, it is no new story about the unfinanced U.S. pension system, but a formerly reliable investment is being shaken by the collapse of Evergrande. “Over there,” Chinese investors also considered it too big to fail. The Chinese Communist Party is frantically dealing with the disaster. Most state-led urban pension funds require employers to contribute 16% of staff basic salaries to the pension funds, a ratio higher than most countries (Finimize). Yet, the retired still end up with less than 50% of their salary and this is projected to shrink more. The country is also facing a demographic change. Much like retiring U.S. Baby Boomers, Chinese retirees will increase in number sharply to one third of the country’s population.
The crisis there is happening in a country where 70% of its wealth is stored in real estate; the number of 35% in the U.S. Further, Chinese state-led retirement funds will peak at $1.09 trillion in 2027 and may be exhausted by 2035 (Fortune).
In one aspect, heavy Chinese investment in U.S. real estate is a sign of middle-income Chinese desire to give their children a more prosperous future. (As a college student, I once rented a room from a Chinese immigrant couple who had a young daughter and they were determined to make her a success, studying with her every night after dinner and making early to bed early to rise a maxim.)
But in China, Xi and the party are reining in the Chinese property market. The country is plagued with “rising property prices, falling productivity, lagging economic growth and social instability” (Wall Street Journal).
2008 blindsided many people. Rumblings of economic collapse were ignored as the profits of the real estate market seemed infinite. An enthusiastic colleague said “everyone wants to move to San Diego. It’s only going to go up.” Day-to-day gains didn’t portend disaster.
But are American consumers really going to take a hit? The answer can be seen in last July, when the pension system here lost $400 billion in their investments in Chinese companies. (Chief Investment Officer Yu Ben Meng of the California Public Employees’ Retirement System, the largest public pension fund in the nation, was under scrutiny for his “long and cozy relationship with China”). CalPERS “has invested $3.1 billion in Chinese companies, some of which have been blacklisted by the U.S. government” (California Globe).
Institutions are now raising interest rates and paying back debt is becoming harder. Evergrande failed to make payments to its bondholders. It can sell assets or take out more loans to make the payments—not great options. The CCP is allowing the company its “restricted default” and is injecting more than $188 billion (CNN) into the economy to prevent further damage.
But the measures have been painful for both global investors and thousands of Chinese investors who have bought unfinished apartments–along with now-out-of-work construction workers and suppliers. The culprits are “poor management and blind expansion”; the CCP wants to let the company fail while trying to protect the economy and markets (CNN).
Printing yuans is a precarious move that is not unlike what we have already been doing in the U.S. But cascading problems may be at hand. Back in November, CNN said that “financial stresses in China…could further strain global financial markets and negatively affect the United States.” This has all the hallmarks of going global. Evergrande is actually one of a number of Chinese real estate developers to default and as the Chinese penchant for its real estate has fallen, so has the prices of new homes. The country’s originally projected economic growth of 7.8% is now estimated to be 4.3% and the CCP’s efforts are now redirected toward aiding investors, helping construct rental units, implementing favorable land policies and promoting other industries, like technology, and possible shielding Chinese banks’ assets from the crisis (CNN).
We’re not so bad off it seems. Our news outlets do not seem concerned either. But while there are some solutions to the pensions crisis (How To Fix America’s Retirement Crisis – Forbes Advisor), no one seems brave enough to stop the spending and prepare for another recession. Let’s no more delude ourselves: when the power goes off and packages are no longer being delivered, we’ll then see the problem even more.