Rates opened up lower today, partially because of the issues China is having with some of its more debt-laden companies such as Evergrande (the huge Chinese Developer teetering on bankruptcy, that was all over the news last week) – according to Barry Habib of MBS Highway.
Mr. Habib reminds us that China is dependent on U.S. demand and now that all the U.S. stimulus is winding down, both the U.S. and the Chinese economies are impacted.
This even impacts companies like Evergrande which are largely focused on construction and real estate within China.
(Here is an interesting recent Odd Lots Podcast discussing Evergrande at length – for those who are interested)
Habib’s comments further remind us how intertwined the U.S. and Chinese economies are – making it very clear that every major macro event in China has a strong impact on the U.S. – and particularly on mortgages and real estate.
CHINA FACING SERIOUS PROBLEMS
China is facing a multitude of very serious problems including (1) a major demographic/growth problem because of their “one-child policy” that limited population growth for years; (2) a lack of natural seaports and key resources; and (3) a highly leveraged (too much debt) economy with a banking system that is besieged by bad debt (not unlike America’s economy I might add).
Investors know all this, so any crack in China’s system can send investors out of equities (stocks) and to the ostensible safety of U.S. bonds, and that usually pushes rates down.
From 2009 – 2012, we saw how debt crisis in countries as small as Iceland or Cyprus would send investors into a panic, so major issues in an economy as large as China’s could start a domino effect that could result in another “great financial crisis” (GFC).
MINOR ISSUES GOOD; MAJOR ISSUES BAD (VERY BAD)
So – minor cracks in China’s system are probably good for mortgages and real estate, as they bring down rates and make homes more affordable.
But – a major fissure could start a domino chain that could send our entire world economy into a tailspin – drying up capital and demand overall and freezing markets.
Entities with exposure to Evergrande alone include the thousands of Chinese who gave them down payments for future homes; the huge suppliers who sell Evergrande concrete, iron and other major raw materials; over 100,000 employees; and numerous Chinese banks.
Evergrande is about the same size relative to the Chinese economy that Lehman Brothers was to the U.S. economy when its failure seemed to spark the 2008 GFC.
