From the Notebook posts are reworks of articles originally published for my Patrons. This one was first published on September 7th.
While it’s becoming easier to see how the various projects supporting the Great Reset are progressing just by reading the headlines and seeing how things are spun to manufacture consent, sometimes a story is deeper than the headlines.
I’ve watched the situation surrounding Evergrande’s collapse in China unfold like everyone else in this space. Like many of you, and hat tip to Zerohedge for being on this from the beginning, I could tease out some of the story just by following the progression of the headlines, especially in light of China’s big changes in attitude towards foreign capital.
Over the past 2 years China has cracked down on a number of sectors within its economy. It started with the moves on Hong Kong and the extradition law which sparked huge protests in the summer of 2019. It evolved into the curious disappearance from public life for months of Alibaba CEO Jack Ma. This summer we saw China uproot the cryptocurrency market by kicking out all of the bitcoin miners over a weekend, they’ve doubled down on this policy again recently.
In September 2019 I wrote that I thought China’s moves on Hong Kong were pre-emptive moves to undermine British influence there through the banking system. Because, the protests in Hong Kong last year looked an awful lot like Portland’s and Minsk’s and Kiev’s (2014) etc. etc.
There’s a color revolution angle here that hasn’t been openly discussed.
My working thesis at this point, and this is conjecture based on my intuitions, not journalism, is that the through-line here revolves around what can best be termed the British Deep State.
British oligarchy has deep roots in India, Israel, Hong Kong, Saudi Arabia and the U.S. intelligence and diplomatic corps. It has deep animosity towards Russia, China and Iran, far deeper than the U.S. does.
This is policy that goes back more than one hundred and fifty years. The City of London is the primary domestic obstacle to Brexit.
Hong Kong is a key cog in the West’s ability to control China’s growth, so destabilizing it now makes sense. The Hong Kong dollar is pegged tightly to the U.S. dollar and the arbitrage trade between offshore and onshore yuan is the source of a lot of ‘tail wagging the dog’ in financial markets.
It makes even more sense if China’s new extradition law was aimed at bankers and prop traders guilty of currency manipulation of the offshore Yuan trade than it is about ‘human rights abuses.’
Now, the Hong Kong dollar peg didn’t break and eventually things calmed down. That thesis, however, of the extradition law being about kicking out British ‘bankers’ who were really British Intelligence from Hong Kong tracks with everything that’s happened since then. The resultant riots were spun up to cover and/or stop this, possibly foment a color revolution there.
In the end it didn’t work.
Xi learned a valuable lesson about allowing Western ‘influence’ and money run wild on his shores. And he didn’t like it one little bit.
Now fast forward to today where he’s making similar moves to the ones Russian President Vladimir Putin made last decade to eventually destroy the color revolutionary forces mounting there — kicking out the foreign NGOs, cracking down on foreign ‘journalism,’ jailing oligarchs and rooting out IMF-influenced financial liberals at the Bank of Russia.
Sound familiar? After taking control over Hong Kong and putting all the ‘tall poppies’ on notice, Xi is removing the one child limit for families, outlawing metrosexuality in Chinese media, limiting ‘screen time’ for children and, most importantly, changing the rules for foreign investment.
He’s done this so aggressively and, apparently successfully, that none other than Societal Vampire himself George Soros has written not one, but two, op-eds recently denouncing Xi in Satanic terms.
Takes one to know one, I guess.
All of these things have something in common, rooting out all competition to China’s rollout of its digital yuan, which has been in trial usage for the past few months. I believe the story surrounding Evergrande’s collapse is part and parcel Xi’s strategy to remake the way capital is handled inside China.
So, building on September 5th’s Patron Market Report where I talked at length about Michael Every’s article on Xi’s relationship with Mao, Lenin and Marx himself, let’s dig in to what’s going on with Evergrande.
Shanghai exchange data showed the bonds sliding more than 25% to a low of 40.18 yuan after the resumption of trade on Monday afternoon. The company’s 5.9% May 2023 Shenzhen-traded bond , which was also suspended, fell more than 35% after trading resumed. China Chengxin International Credit Rating Co (CCXI) downgraded Evergrande and its onshore bonds to AA from AAA on Thursday, and placed the company and its bonds on a watchlist for further downgrades, effectively freezing the company out of the repo market.
The endgame for Evergrande started on Friday, when China Securities Depository and Clearing Co. (CSDC) reduced the “conversion ratio” of the July 2022 bond to zero, effective Sept. 7. Other Evergrande bonds were not included in CSDC’s table of conversion ratios on Friday as they no longer qualified for inclusion. The conversion ratio determines leverage limits for repo financing given a specific bond pledged as collateral. CSDC is owned by the Shanghai and Shenzhen stock exchanges. In other words, Evergrande suddenly finds itself with zero access to the repo market which funded it to the tune of billions heading into Friday.
Since then Evergrande’s bonds have stopped trading altogether, angry property owners are surrounding the main building and the company is well on its way to being China’s Lehman moment.
Evergrande’s problems were so large that even disposing of assets over the past year did nothing to firm up its rapidly deteriorating balance sheet.
Being the biggest mortgage lender in China, its collapse would be catastrophic for China’s near-term financial health. And, as of Friday, the PBoC finally began taking the situation in the grander sense seriously.
The People’s Bank of China added 90 billion yuan ($14 billion) of funds on a net basis through 50 billion in seven-day and 50 billion in 14-day reverse repurchase agreements on Friday offsetting 10 billion in maturities, the biggest one-day injection since February; it marked the first time this month it added more than 10 billion yuan short-term liquidity into the banking system on a single day.
One would think that such a large player would immediately get a bailout from the PBoC, but it didn’t come immediately. In fact, it’s barely materialized.
And that’s why this story is so interesting in a global sense.
Because now that Evergrande’s collapse is all but assured in real terms, the first question that comes to mind is, what comes next?
Nothing good, obviously. For the past two weeks I’ve watched various markers of dollar liquidity roll over all around the world. German bunds keep rising in yield.
The Euro is in freefall, despite the ECB coming out last week talking about tapering QE in real terms, while the Fed is still making goo goo eyes at the dictionary definition of ‘transitory’ hoping some Wikipedia ‘editor’ will come in and change it for them.
Not convinced? How about that silly old USDX that everyone thinks is going into the toilet next month.
I have a few more, but nothing says trouble like a choppy short end of the U.S. yield curve.
But the better question is who benefits?
Xi has systematically cut down all the ‘tall poppies’ in China’s financial system over the past year. He went on a rampage through the competition for his Digital yuan over the summer.
So, it tracks that Evergrande may be part of a bigger plan to take greater control over the property market in China by the state.
And for everyone now reflexively screaming “Communism!” realize that if this is China’s Lehman Bros. what was the ultimate effect of that debacle here in the U.S.?
The nationalization of the mortgage industry with Fannie Mae and Freddie Mac backstopping and setting the rules for every mortgage in America.
Michael Every pointed out (article linked above) that there’s also precedent for this in China, as he notes about ‘The Zhejhang Example”
- Direct targeting of inequality (of intra-provincial GDP per capita gaps between rural and urban areas);
- Aiming to increase the labor share of GDP to > 50%;
- More urbanization;
- Property taxes (on private housing) and building new state-owned rental properties (i.e., social housing);
- Letting people without official hukou residence access state services, which is a genuine revolution;
- More spending on social services – and “donations” from local billionaires collectively worth $236bn;
- Lower cost business loans for favored sectors, including manufacturing, agriculture, and tourism;
- SOEs building more infrastructure, “even if it generates low returns”; and
- Breaking up monopolies.
When I first wrote this for my patrons on September 7th, I said..
If Evergrande was going to get a bailout it will happen when its bonds have been driven to literally pennies on the dollar. At that point the state can come in, guarantee the mortgages and buy them up in one big Blackrock-esque plundering a la Venezuela.
Hrmmm. I guess I was a little optimistic in thinking that they wouldn’t just be driven to literally zero. It must be my free market principles showing.
Sure, dealing with Evergrande will require a lot of money from the PBoC, possibly even writing down the value of some, if not all, of those mortgages, once those pesky bondholders have been bankrupted.
The Yuan will have to weaken some, probably 10% back towards 7.00 versus the dollar.
But, after all of this, I think that’s just the first part of this story.
The second part is what Zerohedge brought up 11 days ago via reporting from Bloomberg….
U.S. dollar bonds of other Chinese financials are now in real trouble. How many times have I made the point that offshore dollar-denominated debt is the reason why the dollar can’t crash like so many talk about?
Well, I guess I have to make it… again.
With Evergrande’s collapse now a question of when not if, concern is building about the financial health of other Chinese developers, including Fantasia Holdings Group Co., Central China Real Estate Ltd. and Guangzhou R&F Properties. Moody’s lowered its rating on Guangzhou R&F by one notch to B2 on Friday and put the builder on watch for further downgrade, citing increased refinancing risks. Guangzhou R&F’s note due 2023 is at 58.4 cents after plunging 18.7 cents last week.
The Money Shot from Bloomberg:
Property firms need to repay or refinance some $14.6 billion in dollar notes maturing through the end of this year. Dollar bond sales in August by Chinese developers were the lowest since the lunar new year lull in February, and were just 14% of January’s volumes, Bloomberg-compiled data show.
This is where the next part of this story slots into place. This is feeding the rising dollar. it also feeds right into Xi’s plans to de-couple and de-dollarize the Chinese economy. How easy is it for him and the PBoC to simply shut off the flow of dollars through Hong Kong and create a massive arbitrage opportunity between offshore yuan (CNH) and onshore yuan (CNY)?
The result would be the collapse of all of these firms. When a state does this, like China’s, they have the opportunity to nationalize all the property under management, write down the debt, stiff the bondholders and call it a day.
When Obama and Bernanke did it, they called it ‘saving capitalism from itself.’ Ask me why I’ll never buy another GM product, aside from the fact that they are some of the worst cars on the market.
When China does it will it be any differently reported at home?
It doesn’t matter if it smells like teen communism…
China is indeed undergoing massive changes to the way it handles capital. Lastly, how easy would it be for the Fed to help or hinder this process by feeding or denying the markets dollars?
As I’ve been banging my shoe on the table about since June’s FOMC meeting, the Fed is already tightening. If Powell is so dovish like the perma-USD bears tell us, why has he pulled more than $700 billion off the market in less than 90 days?
The Fed touched off a firestorm in June and it began in the Chinese Junk Bond market. The Bloomberg article linked above led with this chart (annotations mine).
Bottom line, the US dollar is going higher here… a lot higher.
And cui bono? Or, more importantly, cui fooked?
For days leading up to the ECB’s latest meeting the media kept trying to jawbone down the dollar by telling us that Christine Lagarde would taper QE. She announced that she would but gave no timetable nor amounts or anything. Just a big fat, French, “Trust me.”
Lagarde’s announcement was fodder to the fiscal conservatives in Germany that they ‘
“no really, aren’t on the hook for the EU’s massive pile of steaming, negative-yielding sovereign debt.” Once the German elections are over and Germans make the mistake of thinking that the Democrats (SPD) are any different than the Republicans (CDU) she will turn right back around and pursue even more QE to quell rising debt yields.
It will be a stark reminder that in a few weeks Germans will become subjects of the new, improved EUSSR which will also need no competition to their coming digital euro.
This is why the markets were bearish for around 10 days, we needed to rebalance and reset expectations within a strong US dollar regime. But, that’s clearly over as globally large caps are seeing “Monster Reallocations” as the shift from public debt to private assets continues. I see no reason to think Powell can’t allow equities to correct a solid 10-15% if need be in any dollar liquidity crisis.
The benefits to the Fed are simply too big to ignore.
The final series of questions I have for you are as follows:
- Is China pushing the Fed to fight a rising dollar to help remake its property market?
- Is the ECB pushing the Fed to do the same thing so they can satisfy the Germans by ending QE?
- Is the Fed’s tightening of US dollar markets putting everyone on notice who’s really in charge?
- What happens if the Fed looks the landscape over and by doing nothing in 10 days, makes everyone else’s heads spin?
Remember, China will need to de-value here, print a whole lotta yuan to deal with the fallout from Evergrande. A strengthening dollar feeds right into that need. The one who can’t afford a rising dollar is Lagarde and the ECB.
Lagarde tried to defend the euro by being hawkish and failed. Lawyers make shitty central bankers, if you haven’t noticed. The Fed can do nothing and still be in control of the situation. In fact, with the Euro closing in on the $1.17 Maginot Line again, aren’t they, in fact, firmly in control of Europe’s destiny?
If I’m right and China and the U.S. do not want to be manipulated into a war over COVID-9/11 then we’ll see the Fed assist Xi in de-coupling China’s property market from the U.S. dollar. That’s Xi’s gibs. The Fed gets to rein in the crazies in Congress and stiff the EU who think they are actually relevant.
Evergrande plus positive RRP yields and the threat of no fiscal stimulus from the U.S. should be more than enough to pull this off.
This would force the ECB deeper into, forgive the pun, the Chinese Finger Trap of what Germany needs (deflation, weak EUR and higher rates) versus what the weak EU states need (inflation, strong EUR and lower rates) making it ever more likely that the EU will have to face a split of its own in 2022.
Now, about that phone call between the U.S., the U.K. and Australia cutting the French out of the nuclear submarine market?
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