The problem isn't just Kaisa, or even just Evergrande. The problem is the Chinese real estate developers have at least $5.2 trillion in debt outstanding with most of that debt backed by overvalued/overappraised property. Not quite as risky as a promissory note but not commanding the kind of interest rate an uncollateralized signature loan would demand.
Making things even scarier is how much of the debt is denominated in dollars. Any weakness in the yuan immediately raises the cost to buy dollars to make interest payments. And because yuan weakness would also raise the cost of redeeming the dollar-denominated debt, the present value of the debt would drop precipitously just because of the forex, even before credit considerations.
From Bloomberg via Singapore's The Business Times. December 3:
Kaisa bondholders reject Chinese developer's debt swap proposal
[SHANGHAI] Kaisa Group Holdings failed to win approval from bondholders for a debt swap designed to avert default. The firm had sought to exchange its US$400 million of dollar notes maturing Dec 7 for new ones due 18 months later.
The offer to exchange the notes failed to meet the required 95 per cent approval rate, according to a statement from the company Kaisa, which became China's first developer to default on dollar debt in 2015, now risks once again reneging on its obligations.
A crisis at the company could spur contagion risk just as global investors return to offshore property bonds. Kaisa is the nation's third-largest issuer of dollar notes among property firms, with some US$11.6 billion outstanding.
"To ease the current liquidity issue and reach an optimal solution for all stakeholders, the company is assessing and is closely monitoring the financial condition and cash position of the group," a stock exchange filing from the firm said on Friday.
"It will explore feasible solutions (including but not limited to renewal and extension of borrowings and disposing of assets)."
The company previously said it may not be able to repay bonds and could consider a debt restructuring if its exchange offer didn't gain support....
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Kaisa faces a December 7 deadline to figure out what they are going to do.
Regarding the currency, The yuan has strengthened from 6.51 to the dollar when whispers of acute stress at Evergrande started making the rounds in late July, to 6.3758 thanks in large part to record monthly trade surpluses vs the world and until October vs the U.S.
A couple hundred billion of the developer debt is dollar denominated. With another two trillion+ of government and other industrial debt denominated in dollars. Some commercial too.
As we've been saying since the Polish homeowners got trapped in Swiss franc denominated mortgages in 2014, borrowing in a currency other than the one you book your income in can produce awful results.
Should the worst happen on the currency front, say China's economy slows just as the rest of the world cuts back on their imports and the yuan jumps 10% to 7:1 the analog won't be Lehman but Credit Anstalt.
The problem with these situations is you don't know how deep the rot goes until the positions start to unwind. That's how a stupid (relatively) little family office, Archegos Capital, came close to causing serious problems, re-re-hypothecated collateral and 100:1 leverage in some of the positions meant no one was really aware of what would happen if the market for the collateral stopped ascending.
In the Evergrande case, if the mess gets into the trillions of US dollar equivalents, the Chinese may need more ammo than they posses to contain the fallout. Hence the question of Fed assistance.
For more on the junk collateral behind the junk bonds see October's "Michael Pettis: «China Is Probably the Most Overvalued Property Market in the World. Evergrande is a Symptom of That»" and "PricewaterhouseCoopers, Evergrande, Cayman Island Shell Companies, and Alec Baldwin: Whack News Roundup":
House Hearing: PricewaterhouseCoopers Signed Off on Evergrande’s Books, Which Counted “Unbuilt and Unsold Properties” as Assets
And 2019's "China Has $3 Trillion of Dollar Denominated Debt. That Is A Potential Disaster".
