Bonds of China’s Largest Property Developer Crash to 25 Percent of Notional Value


by Mish Shedlock, Mish Talk:

Hello there Purchasing Power Parity GDP advocates and China horn tooters in general, let’s discuss real estate.

Bonds of China’s Largest Property Developer Crash

Please consider Another Big Chinese Property Domino Is Wobbling.

Shares and bonds of property giant Country Garden Holdings dollar-denominated bonds maturing in January 2024 are trading at 25% of their notional value, compared with 81% as recently as mid-June.


Contracted sales at the country’s top 100 developers plunged 33% from a year earlier in July, according to China Real Estate Information.

Beijing’s latest moves to support the sector—including making it easier to buy an apartment—don’t seem likely to help much. The fact that even the biggest developers can still run into trouble, nearly two years after Evergrande’s struggles first reached a fever pitch, presumably gives potential home buyers little confidence.

Speculative demand for housing—in the form of second and third, often unrented homes—supported the market for years, helping paper over China’s weak demographics. But the protracted downturn and the government’s hands-off approach appear to have seriously undermined the assumption that housing prices will keep going up endlessly, over the long run.

Goldman Sachs says China’s urban housing demand will fall to 11 million units this year, from 18 million units in 2017. The country’s developers built around 13 million units a year on average over the past decade. And the bank says Chinese developers have around $9 trillion of inventories—including raw land and uncompleted projects—equivalent to around 4.8 years of estimated contracted sales this year.

Purchasing Power Parity Silliness and the Myth China Passed the US in GDP

The subject of Chinese real estate came up a few times recently with still more readers insisting China passed the US in GDP.

One reader commented “The best comparative measure of national economies is widely accepted to be Purchasing Power Parity (PPP). Comparison of nominal GDP by converting all output to dollar equivalents is not meaningful. PPP GDP captures the real productive value of an economy. By PPP, China’s economy surpassed that of the U.S. several years ago and is substantially larger.”

Let’s review Purchasing Power Parity Silliness and the Myth China Passed the US in GDP

Hoot of the Day

The CIA clings to non-PPP based GDP. What a hoot! The CIA has nothing to do with this. If anything, it is the IMF that wants to back PPP for political reasons. I will skip other inane comments and get straight to the point.

Michael Pettis: “Adjusting GDP for differences in purchasing power makes a great deal of sense in certain cases, but the way it is done is so filled with problems that it is extremely difficult to find any economist who takes these measures very seriously,” and to that I would add, especially for countries that hide debt as assets and who calculate GDP in vastly different ways.

New Comments Today

  1. If you are going to cherry pick how China over counts GDP you have to also point out the way that the US over counts GDP. The US imputes a huge chunk of GDP that China does not (like owners equivalent rent). Also in the US a significant portion of GDP is generated by transactional inefficiency (legal and accounting services) and price gouging (health care) which happen to a much smaller degree in China or anywhere else for that matter. Even if the Chinese like to carry assets at book value rather than market value this is common conservative approach to company valuation in finance even in the US. I am not convinced that this way of carrying assets introduces an overwhelming amount of bias.
  2. The bottom line to our world is about real physical entropy changes. This is what ultimately matters the most to most things. On this front the Chinese economy clearly dwarfs the US economy. For example China has about 1/3 the electricity generation capacity of the entire world.

Grossly Distorted Procedures

I have picked on the US countless times over GDP calling it “Grossly Distorted Procedures”. Many have not read my past comments questioning US GDP.

But the property bubble in China is unlike anything else in the rest of the world. China has vacant malls, vacant airport, vacant entire cities. The State Owned Enterprises are all insolvent.

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