We're About to Witness the Biggest Round of Bailout Capitalism

Evergrande is just a red herring

Editor’s note: As I release this, Evergrande’s bonds have been halted in Hong Kong.

After nearly three weeks of intensive media coverage on Evergrande, China’s second-largest property developer on the brink of financial collapse, hopes of a knight-in-shining-armor bailout from the Chinese Communist Party (CCP) have turned from prime real estate into sawdust. In the golden age of rescue capitalism, global investors must have thought for sure that the CCP was going to open its coffers and bail out Evergrande.

They were wrong.

Instead, Chinese authorities have ordered local governments to prepare for the real estate behemoth’s potential destruction. Bondholders, including major banks, asset managers, and hedge funds, have failed to receive interest payments. Rating agencies have downgraded Evergrande’s debt, making some of its bonds untradeable. Also about to join the illiquid club is its publicly-listed stock, which continues on its Lehman-style plunge toward zero.

As the West has finally picked up on the unfolding Chinese market turmoil, every talking head has ventured a guess at what kind of contagion Evergrande’s unwinding might harbor. Crying wolf, the financial media has warned that economic ruin is both near and far, with headlines ranging from Lara Williams’s Everyone Needs to Worry About Evergrande to John Authers’s Evergrande Isn’t a Lehman.

Consequently, mass hysteria has engulfed Finance Twitter, as users try to keep up with the constantly rotating newsflow, while also attempting to decipher the growing number of hot-take predictions from every prominent China expert, economics wonk, and geopolitician on the platform.

China Beige Book, the largest private provider of Chinese economic data, chose to quell mass panic, tweeting Evergrande may “cause systemic stress” but it “won’t be China’s Lehman moment”. Famous pseudonymous FinTwit users, however, predicted doom and gloom: “Evergrande Is Dead,” declared TheLastBearStanding. “Contagion is [next].” Real-life people boasting skin in the game also reached a grim verdict, like analyst Adam Cochran, who, after penning a 31-tweet mega-thread, concluded that “we’re currently staring down the barrel of the next financial meltdown.”

The ever-increasing level of noise that Evergrande has created lately will be enough to make the casual observer think its downfall came about suddenly. But, in fact, it’s been a slow, creeping decline, dating all the way back to February this year.

As America’s monetary leaders have kept their U.S dollar engine firing on maximum horsepower — helping to fuel the most bogus, debt-fueled economic boom in the modern era, the Chinese elites, on the other hand, have embarked on a radical anti-bubble mission.

Ever since late 2020, CCP head honcho, Xi Jinping, has pledged to deliver “common prosperity” in China by, among other things, attempting to curb excessive financial speculation in a once-booming real estate sector. Through his three red lines policy (where overleveraged real estate firms must aim for a net debt-to-equity cap lower than 100%, possess a 70% ceiling on liabilities to assets, and keep more cash on hand than short-term debt), Xi hopes to level the playing field by what CCP internal documents describe as a “marketized decline” — Federal Reserve-esque lingo for restructuring troubled entities while achieving a stable market exit.

Having avoided a widescale financial or social crisis so far, the CCP has still felt the pain of undergoing a controlled demolition of their gigantic real estate bubble, which — if we had to hazard a guess — they must have been expecting. When you rip the bandaid off after twenty years of casino speculation, in an asset class as socially cohesive as housing, you’re bound to run into not only one but a few obstacles eventually.

For Xi, rising social unrest emanating from suppliers, employees, contractors, and customers of Evergrande remains the biggest concern. As the housing giant’s $300 billion debt pile keeps deflating, protests like the 100-strong horde marching on its headquarters could be the start of more significant uprisings.

Plus, with Chinese stonks experiencing their worst performance versus other world indices in almost twenty years, Xi will also have to feel the financial pain. As you can imagine, property stocks have been hit the hardest, since fears of a crackdown on similar companies have caused panic-selling among investors. The Lippo Select HK & Mainland Property Index has plunged roughly 50% year-to-date, while some companies have seen their share price split in two again, only in the past few weeks.

No doubt, this reveals that the CCP has commenced the popping of the biggest real estate bubble in Sino history, but is this the beginning of the end for global bailout capitalism, the end of propping up mammoth bubbles for elitist gain? Far from it. Despite common prosperity goals, the Chinese elites have not stopped their relentless pumping of liquidity into financial markets. As the western “hot money” flow reverses with, as usual, dire results for China and its emerging market neighbors, the People’s Bank of China (PBOC) has reopened the liquidity taps, continuing to prop up its 21st-century debt colossus.

That said, if Evergrande or any other entity poses a risk to its monetary order, the CCP will graciously step in and nationalize them without hesitation. It’s a response we’ve seen several times before, and over the past few cycles, it’s become the new norm. In 2019, Chinese authorities took over three “bad banks”: Baoshang, Jinzhou, and Heng Feng all within three months — taking moral hazard to a level taller than any Evergrande high-rise. Just over a year ago too, officials rescued toxic state-owned asset manager, China Huarong, which Bloomberg journalists monikered the “Lehman Brothers of China”.

Common prosperity, it seems, magically disappears when it threatens financial confidence and stability, a nuance that most western-world citizens know too well in the bailout era. In a way, America’s nonexistent response to China’s new posture on bubbles says it all about those who run the show in the West: Economic inequality is at its most potent but it’s the last thing running through their minds. At least their Asian hyperpower rival, who’s just “panopticoned” their way to achieving a draconian surveillance society, has tried to create the illusion that they care about addressing economic and social disparities.

The U.S. plutocrats, meanwhile, simply don’t give a damn. They remain hell-bent on bringing about a neofeudalist future, supporting, at all costs, the new quasi-capitalist system of unlimited debt creation to create the greatest wealth transfer in history. Blinded by extreme greed, they don’t seem to care how financialization and money printing cause food and home prices to skyrocket, making it ~7% harder for joe sixpack to afford to live each year. Or how this will turn multiple generations of his kin into debt peons, who will own nothing but IOUs on everything from homes to autos to appliances, even bare essentials.

Instead, they only care about “monetary stability”, a euphemism for sky-high asset prices continuing their rampant ascent. It doesn’t matter that the financial alchemy they concoct to achieve this destroys the concept of price discovery, the sanctity of money, and the purchasing power of citizens. In a system plagued with the Cantillon effect, these are just a few of the many inconvenient truths we must endure.

Only recently, we’ve witnessed the most egregious case, where powerful governmental figures have been caught using centralized information to engage in state-level insider trading, placing sure bets on major policy decisions that they know will pass through Congress. To make matters worse, as the stock market escapades of Robert Kaplan and a Domino’s Pizza accountant illustrate, the average citizen goes to prison for such crimes, but the elites get off the hook. So much for economic equality, let alone the death of crony capitalism.

Observing these prejudices, millennials and the blue-collar class may use Evergrande as a coping mechanism, a way to rekindle their hopes of a “great equalizer” event in the West: where home and consumer staples prices become more affordable; where tight money punishes greater-fool-theory style speculation; where the sociopathic grifter class succumbs to their nemesis of deflation and sound money.

This, right now, is a far cry. A “U.S. Evergrande moment” is a cruel false hope, distracting many from the rampant cheap money status quo, one that the U.S. elite will fight to sustain till they can longer bend economic gravity to their will.

Their next challenge is to address the latest inflation hysteria, which could bring about the most significant economic paradigm shift in half a century: rising prices and dollar devaluation without the Fed’s intervention. But before a hyperinflation event can unfold, the Federal Reserve will likely manufacture another deflationary spiral, turning off the liquidity taps, hoping for the best, and creating another cycle within the Great Moderation.

After deflation sets in and Wall Street comes calling, the Fed will restart the bailout engine, creating a moral hazard inferno of hellish proportions. Any financial entity that threatens the status quo won’t find itself on its way to an ill-deserved Valhalla but will survive another day, never coming close to suffering the same fate as Evergrande.

Debt, risk, and greed have reached all-time highs in the West, which makes Evergrande’s managed decline a persuasive red herring. But we’re nowhere near facing the end of bailout capitalism. In fact, its biggest round lies just around the corner.