The Chaser Report - An Evergrande Solution to Australia's Housing Crisis

Episode Date: July 30, 2023

Charles Firth brings you on an in-depth study of the housing crisis being occurring in China, and how it mayyyyyyy result in a sequel of everyone's favourite 2008 Global Financial Crisis. Hosted on Acast. See acast.com/privacy for more information.

The Chaser Report is recorded on Gatigal Land. Striving for mediocrity in a world of excellence, this is The Chaser Report. Hello and welcome to The Chaser Report with Dom and Charles. Today we're going to talk about the financial situation of a Chinese property company. Hold on to your hats, people. It's going to be big. It's going to be exciting. This is going to be fun. And I've been looking forward to Charles telling us this story. This is one of his deep dives because it's just absurd. The scale of this thing is. is absolutely massive.

It is nuts. And if you've ever thought, if the thought has ever crossed your mind that property developers are fuckwits, if that little bubble has ever just drifted into your cerebellum, I think you'll enjoy this. It begins after this. So Evergrand is very big, isn't it?

It's gargantuan. So Evergrand, I think I'm right in saying is the biggest, single biggest property developer in the world. Probably. It's the biggest one in China. They build cities at a time in China. And their whole method of poverty development is based on starting again. Like literally getting blank land and then planning out all the roads and all where the building should be

and then just building them before anyone's moved in. When you say blank land, what you actually mean is a growing land full of peasants who worked the land and had nothing. Yes. But effectively, kind of terra nullius in a Chinese sense. Yeah. As terra nullius as Australia ever was. Yes, that's right. But the interesting reason why the local authorities go,

oh, yeah, you can have that land and you can chuck everyone off is because the ability for local authorities who have to fund things like, you know, roads and water and schools and everything, but they also have to fund things like aged care and hospitals and they have to fund everything out of taxes right, but they're not allowed to tax their population, right? They have very limited power to tax their population. The one thing that they can make money out of is selling off or actually leasing off these lands for 100-year leases and things like that and letting property developers build more buildings.

What a billion. So the only way you can fund even basic services in the People's Republic is basically hocking your land to capitalists. So the taxation system is an entirely property development-based. taxation system. That makes so much sense having visited China. And so this has led to even while they don't need any more houses necessarily, local authorities going, no, no, no, go and build another city over there so that they can get more money to pay for all the people who've becoming old age. Because China, as you will recall, about 40 years ago, 50 years ago, brought in the one child policy, which was all about saying you're only allowed to have one child. Amazing.

The title was well chosen, I felt. And they're now sitting on, I think it's been named the worst demographic time bomb in the history of humanity, right? Which is that they have an ageing population and no one to do the work. Yeah, like a much smaller population of kind of workers. Working age people. By design. Yes. By admittedly stopping a massive population in crisis, I can understand with that.

I've also spoken to demographers in recent months who've said that the entire policy was absolutely unnecessary and caused massive heartbreak and that they would have had the same problem no matter what because whenever a population gets richer in the whole of human history, the first thing you do is have fewer children. Yeah, fewer children. As we discussed before.

So they're going to have this problem regardless that has did it in the most cruel and heartbreaking way possible. So what we're facing in China is a complete lack of demand for new cities except from authorities who have to encourage more cities to be built so that they can get taxation to house and feed and do medical care for their populations who don't, who are all ageing, right? Why not just build an empty city? That would be the thing to do, wouldn't it?

Well, that is literally what it has been happening. Just build an empty city. Yes. So, to, to, you sort of go, where is the money coming from that then spurs all this? Yes. And the answer is debt, right? Uh-oh. So, speaking of time bombs.

It's debt. Plus savings, right? So as an ordinary Chinese person, there's very few avenues for you to go, okay, I'm going to invest in a whole lot of stocks and stuff like that, and that's how I'll make my money. Like, the stock market has historically been an incredibly risky thing to invest in in China. For example, if you say we're an investor in Alibaba shares in the last few months, you would have seen, I think it was an 87% drop in your...

wealth after they arrested, arbitrarily arrested Jack Maher, after he said a few things that the Communist Party didn't like. I think the word arbitrarily is really explaining a lot to do with the problems with China's stock market. I mean, they simply don't have the notion we have in the West that if you're a rich founder of a company, you're basically immune from prosecution forever. So the one thing that ordinary Chinese people can invest in, knowing that it will increase year on year in value and it's a great place to hold your wealth. And you won't be

able to relate to this as an Australian Dom is property. Oh, property. Yeah. That's a not about, because people always need apartments, don't they? It's a truth of all human society since the beginning of the industrialised age that we want houses. It's the most basic human desire. What happens though, Charles? And this is not something we can relate to as Australians. If there are more houses, then there are people. I seem to remember an issue like that coming up in America. Yes. At one point.

And a small thing known is the global economy tanking. Do you remember that? What's the thing called the global financial crisis? So what has been happening is all these property developers who are being encouraged by the government to go around and build more. Build, build blocks. Have been taking deposits on new properties from ordinary people, right? So they'll go, oh, here give us $50,000 as a deposit and we'll build this $500,000 apartment

for you. I've been going around doing that. And then they go to the banks and they go, well, can we borrow the other $450,000 to make this apartment and we've got this deposit. I'm sure the bank say sure thing because property's safe as houses. It's never going to lose money on that. You get the deposit.

You use it to build the past houses that you've already sold to somebody else. And then the next, like to build the house that you've just got the deposit from, you'd just encourage somebody else to give you $50,000 and the bank to give you money, right? And so the houses are all in shape of pyramids, basically. Yeah, so it's this giant Ponzi scheme, which then the government realized that this was going on. And they went, hang on, there's like $1.3 trillion worth of just complete rubbish debt in this thing. We're going to crack down on this. So about 18 months ago, they started cracking down on.

And they basically said, you're not allowed to borrow any more money to these property of And as a result, the whole thing came to a massive collapse because suddenly Evergreen. Now we reach the point where we go to Evergrand, right? So just to recap, so this system would work if there was an endless stream of more people moving into these houses. So if you were Singapore or something and you kept building houses for real people who actually wanted them, you'd be fine. But if there was a shortage of people. Or if there was, say, a declining population. Yes, because of your one job policy.

And just the fact that they were having fewer children. Yes. You would suddenly find yourself in a situation where if you were the largest, so how much credit card debt do you have? Like when you get your credit card bill, do you go, ooh, that's a bit big. Oh, it's shocking. Any credit card debt's awful because they charge 20% interest. It's brutal.

So imagine looking at your credit card and realizing that you have lost $120 billion in the last year. In the last year? In the last year, right? I mean, am I, Sam to... So that's how much Evergrand has lost last year. In one year. It's total liabilities are $335 billion US dollars, which is a bit over. It's about $450 billion Australian dollars.

So about half a trillion dollars of debt. I mean, Charles, I used to think of that number. And you talk about hundreds of billions of dollars. I used to think of that as an impossibly large number. There's nothing in the world could possibly get into the hundreds of billions of dollars. Now I just think of it as the cost of a few submarines. Yes, you're right. That number's really achievable now.

I just spend that in a day on a couple of submarines. All you have to do is not fund public housing and you can... I think that's... I think they've got that under control. But the really funny thing is it's also insolvent. Uh-oh. So they owe, they've got this like 400... Let's say half a trillion dollars worth of debt.

They're about $110 billion short. So if they sold off all their assets, it's tomorrow and mean, okay, let's just wind all this up, then they wouldn't end up with enough money to cover all their debts. Are you saying there could be a possibility in the housing market that the total value of all the houses is less than the debt against those houses? That reminds me of something. That reminds me of a financial crisis with, I don't know, global scale.

Yeah, yeah. Well, it does sound eerily like the GFC, doesn't it? Like, it is literally, I mean, it is literally the same. It's slightly bigger numbers. Yeah, yeah. I mean, the GFC was only global. It didn't get into planetary. And look, to be fair, I think a lot of Western commentators are saying,

look, yes, this is on the same scale, or if not bigger than the property market collapse in the US that led to the GFC. But on the other hand, they're just Chinese people. So I think that's their approach to why it's not, it doesn't matter as much. But I haven't finished, right? It gets worse.

So the point is their assets are outweighed by their liability is quite substantially. So what they decided to do is, oh, well, it doesn't matter. So as of December 2021, so this is about, well, 18 months ago, they decided, okay, what we'll do is, we won't call it a fire sale, but we'll just rapidly start selling off our assets just to cover our interest costs and things like that. Did they get the idea from your avocado sale? I think they might. This is all sounding a lot like the chaser. but on a much larger scale.

Oh, shit, wait a minute. No, this is the Jason's account. Sorry, I got the wrong page. No, so they started fire-sailing everything. But the problem is that because they're still running a loss as they operate, they sell off all these assets, but they don't really draw down their liability. So, I'll give you some great figures. So they sold off a total of $45 billion worth of assets,

which is basically everything that they could sell, right? and their liabilities went down by $19 billion. So that's all terrible. So you go, oh, well, it sucks to be you. But, you know, presumably the government, as long as the government supports them and allows them to just trade while insolvent, like what else can you do?

But the problem is, remember all those people who put in like 50 grand to get their apartment built? Yeah, the mums and dads just wanting to have a little slice of China for themselves. None of those apartments have been built. Like, literally for the last 18 months, months. They've just stopped building the apartments that they owe, they're already owed to people. And some, some people who have paid like, not just 10% deposit, but like 20, 40, 50%

deposit. And probably their life savings, right? Yeah, the entire life savings, definitely, locked up thinking this is a good way to store. You can't lose money in property. Everyone knows it. Yeah, that's right. So the problem is to complete the projects that they've already got the money from four would cost an extra $158 billion. So they've got all these liabilities, but they've also got this sort of Ford promises, which I suppose are liabilities. But it's like, what they really need is they need that gap. They need an extra sort of $120 billion just to sort of, you know,

just to keep their balance sheet fine. But they also need another $158 billion just to make good on the stuff that they've already sold. Well, I mean, the solution is extremely simple. The Australian government should say to Orcas, I'm really sorry. We're going to do the same thing we did to France. The deal is off. We're going to buy Evergrand submarines. The Chaser Report, news a few days after it happens.

Based on this conversation, I just put three words into a search engine because I was curious. I am. The three words were Evergrand Ghost Cities. Oh, yes. I love this topic. So this is from October 2021. There were enough empty apartments, a lot of them in fully built empty cities. You know how many people at that point they could have housed?

Like the empty, enough housing for how many people guessed? Is it like 20 million? It's 65 million. Enough housing for 65. It's the population of France. So in Australia, we don't have enough houses for our population. They're overpriced. There's scarcity in China, assuming that they haven't filled them because the population,

they're probably more of them now. They won't, yeah. These houses are just sitting there empty. I don't know what the Greens are complaining about. Just bring them over on a ship. Yes. Or a submarine. It's extraordinary.

Then they go there. Why can't we just house? You know, all these Gen Z and millennials complaining about not being able to get a house? Send them over to China. So there's one called Ordos Newtown or Kangbushy. It's in Inner Mongolia. I like Newtown. It was intended to house a million people.

Then they scout it back to 300,000. As of 2016, 100,000 people lived in it. But they've built enough houses to accommodate hundreds of thousands more people. So you could potentially have the only apartment in an entire building. And imagine the privacy of that. That would be great. That would be very cool. No neighbours at all.

Yes. So they're not abandoned. They're just like they're not decrepit. They're fine. They're just sitting there new and empty. But see, my understanding though is that they don't have any internal fittings. So the way the Chinese property market works, is it's seen as more valuable to have a hollow shell of a house rather than one.

It's sounding so much like the chaser, a hollow shell. And I mean, this article here, this is an article from Business Insider from 2021. And as they say, Charles, as you're pointing out, yes, part of the problem is that the local authorities are hugely incentivised to sell land for development. That's the one thing that they can do. That's the one thing that they can do. So the point is, any solution to this problem, like this is the ultimate Gordian. Right, which is the government can't turn around and say, well, hang on, local authorities, stop selling off all this land.

The property people would revolt if they don't have services. Yes, because then the local authorities will run out of money. It's like, it's as if the New South Wales government or the Victorian government suddenly stopped being able to collect money from anywhere. Because the revenue pipeline just stopped. So even things like garbage collection would just grind to a hole overnight. Well, that happens in Australia, be fair. My local council hasn't collected it. But, I mean, part of the issue here is.

It says that there's been a massive housing bubble in China. 90% of people actually own houses in China. It's just been the way that everything's worked out. Presumably, social systems help with that. But no one has any clue of what a bubble bursting looks like. It's never happened in all the years of China doing this at the PRC. So everyone's just investing on the basis that it keeps going up. So it really is another GFC.

Except presumably, if this whole thing goes under, and this is what I want to get your view on, does this affect places outside China? I'm guessing, given the natural the global economy, a massive burst bubble in China's enormously huge housing market, probably not great for anyone else either. Well, no, especially not for Australia,

because one of the things that has propped up the Australian economy during the whole pandemic, actually, was the incredible demand for iron ore, which comes from demand for steel, and steel is used to make skyscrapers. So literally, I mean, and the quantities

are unbelievably extraordinary. I mean, it's nice to think of all those ghost cities just sitting there in China with empty apartments. Built with Aussie steel. Ozzie steel. That's quality steel in those empty apartments. So, yes, a collapse in internal demand would be very bad for some countries

that rely on exporting stuff to China. On the other hand, it may actually be a bit of an opportunity for countries like America, which actually has a balance of trades in the other direction. Right. Because what China would suddenly have is a whole lot of poor people. Oh, wonderful. What the US knows all about that?

Under a communist system, you could just make them work for nothing. Well, well, they already do. But, you know, like even less. Oh, even less, yeah. Well, I mean, clearly they've earned enough to be able to buy houses. The Rambi would plummet, and suddenly iPhones would cost half as much as they do. Which, I mean, to be fair, it's probably worth it. I mean, it's very sad people in China.

Yeah. But a cheaper iPhone is worth a bit of pain as long as it's felt by somebody else. Isn't that right? But as against that, I think I've just found out where I'm going to go and buy a house. I've wanted to buy a house for a long time. Clearly, it was an Ordos New City, in India, Mongolia. It's a sure thing. It'll go up.

And when is a house ever lost money except in 2008 when it tanked the entire global economy, except for that? I think the title to this episode should be, at last, a solution to the housing problem. Yes, that's right. We have an ever-ground solution to Australia's housing crisis. What we do is just buy the shells. They're just shells. Get them cheaply. You can't tell me that you can't bring a skyscraper over on a big chip.

Why don't we get one of the local authorities to sell Australia a plot of land in China? We could have an Australian-in-northan territory. Yeah, because that's what they did in Guangzhou. Yes. The English famously had that little sort of island bit. Well, there was also, there was Hong Kong. Yeah. Well, we could have another Hong Kong.

We could be like, had them in Shanghai too, the French concession and all that kind of stuff. Yeah. But a little Australia. Yeah. In China. Yeah. What a brilliant idea. Get on it, Albao.

I love it. Be like a Guantanamo Bay. Our gear is from Road, a part of the Icona class network. And if you want to buy a cheap apartment in China, I've got about 10. that I bought that I can tell you very inexpensively. Yeah.