The China Thread

[DGuller]

I know it's obvious in hindsight, but how the fuck did the US just let a country under threat of Chinese attack be essentially the sole manufacturer of a super strategically important good?  I assume the US is stepping up the production now, but how long will it take to ramp up the production to the point where it's not vulnerable?

Capitalism at work.
What the market says is the most efficient setup may not necessary be the best and most resilient setup.
I really hope we do learn this from covid rather than seeking to get back to business as usual as we did after all those lessons from 2008.

But we know long before Covid that strategically important goods should not be left to the free market.  I think Larch is correct that TSMC has cornered the market on superconductors just on the strength of their technology, but you'd think that we would still be able to convince (or coerce) them to set up some manufacturing capacity here in the US, obviously with some financial incentives.  Even if China doesn't succeed at taking Taiwan, I don't see why it would be more reluctant to give it a Grozny treatment than Russia would be.

[crazy canuck]

I know it's obvious in hindsight, but how the fuck did the US just let a country under threat of Chinese attack be essentially the sole manufacturer of a super strategically important good?  I assume the US is stepping up the production now, but how long will it take to ramp up the production to the point where it's not vulnerable?

Capitalism at work.
What the market says is the most efficient setup may not necessary be the best and most resilient setup.
I really hope we do learn this from covid rather than seeking to get back to business as usual as we did after all those lessons from 2008.

But we know long before Covid that strategically important goods should not be left to the free market.  I think Larch is correct that TSMC has cornered the market on superconductors just on the strength of their technology, but you'd think that we would still be able to convince (or coerce) them to set up some manufacturing capacity here in the US, obviously with some financial incentives.  Even if China doesn't succeed at taking Taiwan, I don't see why it would be more reluctant to give it a Grozny treatment than Russia would be.

I think the answer is a combination of what Larch said and the fact that until recently globalization was considered to be a how modern economies should work.

 

[Jacob]

What do you think Canada and Denmark should do?

Participate in whatever US-led multilateral response is organized.

[The Larch]

I know it's obvious in hindsight, but how the fuck did the US just let a country under threat of Chinese attack be essentially the sole manufacturer of a super strategically important good?  I assume the US is stepping up the production now, but how long will it take to ramp up the production to the point where it's not vulnerable?

Capitalism at work.
What the market says is the most efficient setup may not necessary be the best and most resilient setup.
I really hope we do learn this from covid rather than seeking to get back to business as usual as we did after all those lessons from 2008.

But we know long before Covid that strategically important goods should not be left to the free market.  I think Larch is correct that TSMC has cornered the market on superconductors just on the strength of their technology, but you'd think that we would still be able to convince (or coerce) them to set up some manufacturing capacity here in the US, obviously with some financial incentives.  Even if China doesn't succeed at taking Taiwan, I don't see why it would be more reluctant to give it a Grozny treatment than Russia would be.

They're already doing so. In the last few years they've apparently started exploring ways to increase production outside of Taiwan, specifically in Japan, the US and Germany.

[Tonitrus]

They're already doing so. In the last few years they've apparently started exploring ways to increase production outside of Taiwan, specifically in Japan, the US and Germany.

So we'll have something in 10-15 years?  Cool. 

[The Larch]

They're already doing so. In the last few years they've apparently started exploring ways to increase production outside of Taiwan, specifically in Japan, the US and Germany.

So we'll have something in 10-15 years?  Cool. 

Hey, Rome wasn't built in a day and you don't set up a multi-billion hi-tech factory from one day to the next. 

The one in the US, for instance, has been in the works at least since 2020. It'll be in Phoenix and its original budget was 12 billion $, later reviewed to possibly triple the factory's size and raise the budget to 35 billion $. They started construction in June 2021 and is expected to start production in 2024. The one in Japan is smaller, with a budget of "only" 8.6 billion $. The one planned for Germany is 44 billion $ in budget, as much as the other two combined, but is still at an earlier development stage.

[Josquius]

I seem not too long ago Siemens tried to invest heavily in that area setting up a huge plant near here... Big political celebration... Which failed quickly.

Even relying on one company seems unwise even if it spreads its stuff but that's the way the market goes.

[Zanza]

I seem not too long ago Siemens tried to invest heavily in that area setting up a huge plant near here... Big political celebration... Which failed quickly.

The former Siemens chip division is now Infineon and fairly healthy, among the ten biggest makers of semiconductors.

[Tamas]

So what's the economic situation in China? I heard mentions of unrest in some region over the Evergrande property thing?

Also a week or so ago I saw mention something what sounded like a lot of stimulus spending planned by the government. It is sounding a bit like they are entering their own rendition of the 2008 crisis, which would be awful timing.

[The Minsky Moment]

Two key aspects of the Chinese economy: (1) RE prices don't just matter because of the housing market but because local and regional governments finance themselves through land sales. (2) Infrastructure spending is used to hit GDP targets regardless of need.  If you see announcements of big new programs out of China, it means the functionaries believe they are below the GDP targets.

[The Larch]

China banks told to bail out property developers as mortgage boycotts threaten economy
Intervention comes as thousands of homebuyers refuse to make mortgage repayments in deepening property sector crisis

Chinese banks have been told to bail out struggling property developers to help them complete unfinished housing projects and head off the growing mortgage strike that threatens to seriously damage the economy.

With thousands of homebuyers banding together to refuse to keep up with mortgage instalments on unfinished apartments bought off the plan, regulators have stepped up efforts to encourage lenders to extend loans to qualified real estate projects.

The China Banking and Insurance Regulatory Commission (CBIRC) told the official industry newspaper on Sunday that banks should meet developers' financing needs where reasonable.

The CBIRC expressed confidence that with concerted efforts, "all the difficulties and problems will be properly solved", the China Banking and Insurance News reported.

Chinese bank shares still rallied on Monday in wake of the regulator's intervention and a belief that the government in Beijing will have enough policy measures at its disposal to control the situation.

However, it was not clear whether the banks would be able to absorb the cost of the mortgage strike, which is affecting an estimated 100 projects in 50 cities.

The value of the mortgages involved amounts to 2bn yuan ($300m), according to data from the banks on Friday, but some analysts think the real figure is much higher. GF Securities in Guangdong, for example, said that the amount could be 2tn yuan ($300bn).

The property sector in China, which accounts for up to 30% of economic output, has been in crisis since the slow collapse of the second biggest developer, Evergrande, began last year. Since then the toxic fallout from its default on a large part of its $300bn debt mountain has started to spread throughout the economy.

As the government's zero-Covid policy continues to cripple activity and property sales continue to struggle, analysts at S&P issued a chilling warning on Monday that the writing was now on the wall for property companies facing bond payments totalling $88bn before the end of the year.

"The end of the beginning is at hand for China developer defaults," S&P said. "In the first stage, firms asked investors to exchange or extend defaulted bonds, to buy some time until the property market recovers. In the next stage, we assume investors will lose patience for such deferrals, especially if home sales do not soon recover."

If home sales do not pick up sufficiently, S&P said, up to one in five of the rated companies face going bust.

"Based on our sensitivity tests, at least one-fifth of rated Chinese developers could be insolvent. This assumes no refinancing, and that all pre-sold obligations are completed."

In another note, the rating agency downgraded the Henan province-based developer Central China Real Estate to a B-minus rating as sales fell 55% in the first half of the year and household income also dipped amid the ongoing problems caused by successive Covid lockdowns.

It also noted that "a series of incidents in Henan" had "sparked homebuyers' concerns over smooth delivery of pre-sold properties in the industry downcycle", suggesting falling confidence in the industry after hundreds of savers demonstrated outside a bank in Henan in protest at not being able to access their accounts.

Mark Dong, Hong Kong-based co-founder and general manager of Minority Asset Management, said Beijing had the will to fix the crisis and expected state-owned developers to step in and acquire troubled projects from heavily indebted private peers, accelerating an industry consolidation.

The CBIRC had already vowed last Thursday to strengthen its coordination with other regulators to "guarantee the delivery of homes".

The rebound in Chinese banking stocks was also aided by news that China will accelerate the issuance of special local government bonds to help supplement the capital of small banks, part of efforts to reduce risks in the sector.

Another regulatory measure included possible tighter rules around the escrow accounts where upfront payments for homes bought off the plan are held. The idea is for that money to be used to complete projects but there is concern that in some cases the funds can be diverted elsewhere by developers to pay off different debts.

[Jacob]

Between a 250+% debt to GDP ratio, Covid-zero policies grinding growth to a halt, government funded thugs undermining public confidence in the banking system, the looming default of massive real estate companies, and the very real risk that billions of dollars of overseas debt will become non-performing China's economy may be a bit at risk:

China's debt bomb looks ready to explode
Many warning signs suggesting that a debt reckoning is imminent

Minxin Pei is professor of government at Claremont McKenna College and a nonresident senior fellow of the German Marshall Fund of the United States.

Confidence in the safety of Chinese banks has been badly shaken by the failure of several small banks in Henan Province in April this year. In terms of their assets of about 40 billion yuan ($6 billion) and the number of customers, roughly 400,000, the shuttered rural banks are minions in China's financial system.

The implosion of these poorly supervised and likely corruption-ridden financial institutions should not be surprising. But how local authorities handled the fallout is shocking even to the most jaded observers of China's political scene.

Instead of compensating the depositors, who are entitled to up to 500,000 yuan, according to government regulations, officials in Henan have done everything imaginable to silence them.

They initially restricted the movement of the depositors by turning the COVID test code on their smartphones red, which effectively made it impossible for them to take public transportation or even drive their own cars. A public outcry forced the Henan government to abandon this abusive tactic.

But when several hundred depositors unable to gain access to their savings in the failed banks gathered on July 10 to protest in front of the People's Bank branch office in Zhengzhou, capital of Henan, local officials sent in a large number of thugs who viciously assaulted the depositors, with uniformed police officers looking on.

This scandal should alarm investors not simply because of the brutal tactics used by local authorities eager to cover it up but because of the circumstances under which these small banks failed.

Ever since China began to binge on debt to fuel its growth in 2009, many have wondered how long the party could go on. To the chagrin of many bearish observers, predictions of a financial crisis have not panned out. Today, China's banking system is still standing despite a debt-to-GDP ratio of 264%.

Perhaps because Beijing seems to be able to defy financial gravity, fewer people these days worry that its ballooning debt could unleash a systemic crisis. But there are many warning signs indicating that China may face a debt reckoning soon.

Weak supervision, poor risk management and corruption that likely drove the small rural banks in Henan into insolvency are systemic among the country's nearly 4,000 small and medium-sized banks with nearly $14 trillion assets.

It is highly likely that other similar banks will fail soon. By pure coincidence, when Henan authorities were cracking down on the victims of bank failure there, authorities in Shanghai had put on trial, in secret, a former billionaire who allegedly controlled a medium-sized bank in Inner Mongolia and used it to fund various illicit schemes. When the government seized the failed bank in 2019, the bailout cost several billion dollars.

If a large number of small banks fail together, such an event could produce a chain reaction threatening the stability of the financial sector. Their counterparties and lenders, especially bigger banks, could suffer massive losses. Confidence in China's shadow banking system, through which small banks attract funds with a higher interest rate, will likely evaporate.

The chances of such a financial meltdown are much higher today than before. One of the reasons that China has avoided a financial crisis in the last decade is that its economy managed to grow at a reasonably high rate, averaging 6.8% a year from 2011 to 2020. A faster-growing economy normally makes it easier to manage or even conceal the debt burden.

But as the Chinese economy is now slowing down rapidly, in part due to Beijing's zero-COVID policy, the debt bomb is ticking much louder.

The most ominous warning light is clearly China's debt-ridden real estate sector. China Evergrande Group, the country's largest real estate developer, which has borrowed more than $300 billion, has already defaulted on its bonds. More defaults seem likely because Chinese developers are on the hook for $13 billion in dollar-denominated bond payments in the second half of this year.

China's debt-laden local governments are also facing grim prospects. Declining income from land sales because of the crisis in the real estate sector and falling tax receipts are expected to cause a 6 trillion yuan shortfall, roughly $900 billion, in local government revenues this year. Local government financing vehicles that have borrowed heavily from banks or issued bonds will have great difficulties servicing their debt.

Large banks in China are in trouble as well. They have lent tens of billions to poor countries as part of China's ambitious Belt and Road Initiative. A significant portion of their credit portfolio is likely to become nonperforming as their borrowers are unable to service the debt due to the global economic downturn.

The most recent economic implosion and the collapse of the government of Sri Lanka will likely force their Chinese lenders to write off a large portion of the loans. If big Chinese banks themselves face rising nonperforming loans abroad, they will be less able to help bail out insolvent small or medium-sized banks at home.

It might be possible for China to dodge another financial meltdown this time. But if local officials have to hire thugs to attack bank customers trying to get their money back, investors should brace for far worse days ahead for China's banking sector.

https://asia.nikkei.com/Opinion/China-s-debt-bomb-looks-ready-to-explode

[Josquius]

It is quite worrying.
If it was just that then I'd hope the good of fuck the PRC would outweigh the bad.
But with all the other economic upheaval factors currently at play too...

I seem not too long ago Siemens tried to invest heavily in that area setting up a huge plant near here... Big political celebration... Which failed quickly.

The former Siemens chip division is now Infineon and fairly healthy, among the ten biggest makers of semiconductors.
[/quote]

What went wrong in the UK?

[crazy canuck]

From the Globe and Mail

When Canadian-Chinese billionaire Xiao Jianhua was kidnapped from a hotel in Hong Kong in 2017, halfway across the world in Poland, David Lesperance's phone started ringing.

Originally from Ontario, Mr. Lesperance specializes in helping wealthy individuals secure alternative passports and move their businesses and money overseas, out of the reach of potentially hostile governments. Or, as he puts it, "protecting your ass and your assets."

For many rich Chinese, Mr. Xiao, who was worth an estimated US$4.5-billion when he was snatched, has become the ultimate cautionary tale.

He had moved much of his wealth out of the country, held both Canadian and Antiguan passports and avoided mainland China, operating instead from nominally autonomous Hong Kong. But in the end, none of this was enough to protect him from Beijing.

When the tycoon finally went on trial in Shanghai this month, Mr. Lesperance said he saw another spike in enquiries from wealthy Chinese wanting to avoid his fate, worried their own escape plans were equally not fit for purpose.

Since Chinese President Xi Jinping came to power in 2012, many elite figures who once thought themselves untouchable have been caught up in his sweeping anti-corruption campaign or by more recent clampdowns targeting the technology and financial sectors.

"When they went after Jack Ma, you had a lot of people saying, 'Well, I'm not as big as Jack Ma, so I better plan accordingly,'" Mr. Lesperance said, referring to the founder of e-commerce giant Alibaba, who largely disappeared from public view after a public spat with Beijing in late 2020.

China's tough "zero-COVID" policy, which has led to draconian lockdowns in Shanghai and dozens of other cities, has also made many Chinese – both wealthy and not – consider moving elsewhere.

Last month, Huang Yimeng, the billionaire co-founder of Shanghai-based gaming firm XD Inc., said he was preparing to leave China, citing family reasons. The announcement was widely discussed online, with many pointing to Mr. Huang's personal experience of the Shanghai lockdown as well as a bruising government crackdown on the gaming industry.

According to investment migration consultancy Henley & Partners, some 13,000 high-net-worth individuals will leave China and Hong Kong this year, almost as many as the 15,000 predicted to depart Russia. They will take with them billions of dollars in assets, with Portugal, Singapore and a number of Caribbean countries among the top destinations, thanks to generous residence or citizenship programs.

Andrew Amoils, head of research at New World Wealth, a South African-based consultancy, said that "affluent individuals are extremely mobile, and their movements can provide an early warning signal into future country trends."

"Wealth emigration is beginning to hurt in China," he wrote in a recent report. "General wealth growth in the country has been slowing over the past few years. As such, recent outflows of [high-net-worth individuals] may be more damaging than in the past."

This could be why Beijing is throwing up barriers to those trying to leave.

China has some of the tightest foreign exchange controls in the world, with citizens only allowed to convert US$50,000 a year, and strict reporting requirements on most overseas transactions. While people with foreign residency or citizenship can move money out of the country more easily, doing so in the current climate may put them on the wrong side of the government.

"You have to plan to try and get as much out as possible, as you're only going to have one chance to do it," said Mr. Lesperance. And you may be leaving behind more than money, he added, pointing to how China has used exit bans to punish the family members of those it deems to have fled overseas.

In 2018, American siblings Victor and Cynthia Liu found themselves trapped in China after travelling there to see an ailing grandfather. Their father, former Bank of Communications official Liu Changming, had left the country in 2007 facing fraud charges, but his children maintained they had no contact with Mr. Liu and no way to get him to return to China.

They were finally released last year, apparently as part of the deal that saw U.S. prosecutors resolve a case against Huawei executive Meng Wanzhou, which also prompted the release of detained Canadians Michael Kovrig and Michael Spavor.

Even just physically leaving the country has become more difficult.

Earlier this year, Beijing announced strict curbs on all "non-essential" overseas travel. While ostensibly in the name of fighting COVID-19, the restrictions coincided with a spike in outbound travel and widespread discussion online of "run-ology," a term used for both the desire to leave and practical tips and strategies for doing so.

In 2021, China issued just 630,000 passports, about 2 per cent of the number handed out in 2019, according to the National Immigration Administration. Applicants now have to show an urgent need to travel, such as a job offer or place at a foreign university.

There have also been reports of immigration staff clipping the corners of Chinese travellers' passports when they return home, preventing them from leaving again, though the NIA has denied that such a policy is in place.

Eva Li, a 27-year-old Shanghai resident, told The Globe and Mail that she tried to renew her passport in June but was rejected.

"I told them my passport was expiring and I wanted to get a new one," she said. "I had a 10-year visa [for the U.S.] on it, and they said it's impossible to renew a passport with a tourism visa on it, as now the policy is that people should avoid going abroad unnecessarily."

Ms. Li said she is worried that leaving the country "might be nothing but a dream in the future."

"I do want to travel more," she said. "To be honest, I'd love to leave tomorrow, but how?"

[HVC]

I'm kind of ok with that.  They profited from corruption and graft, so now face the repercussions. Sucks for the none wealthy though.