Mike Roberts: Not so Evergrande [feedly]

Not so Evergrande
https://thenextrecession.wordpress.com/2021/09/19/not-so-evergrande/

China's Evergrande Group is the second largest property developer in China and it is teetering on the brink of bankruptcy.  Evergrande has hired 'restructuring advisers' and warned that its liquidity is under "tremendous pressure" from collapsing sales, facing protests by home buyers and retail investors.  Based in Shenzhen in southern China, Evergrande is saddled with almost Rmb2tn of total liabilities or over $300bn.

The share price of the parent, 3333 HK, is down 76% from where it started the year. In August, Xu Jiayin, Evergrande's founder and one of China's wealthiest men, stepped down as chairman of the property group. Trading in the company's bonds has been suspended in Shanghai. Police descended on Evergrande's office building in Shenzhen when individual investors in the company's myriad "wealth-management" products gathered to demand repayment.

Evergrande's demise is a reflection of the dangers of uncontrolled property speculation in the capitalist sector of China's economy.  Evergrande relies heavily on customers paying for flats before the projects are completed. The Evergrande property model is essentially a Ponzi scheme, where the company collects cash from the pre-sale of an ever-growing number of apartments, plus hundreds of thousands of individual investors and uses the cash to fund further sales by accelerating construction in progress and funding down-payments. Like any Ponzi, this works as long as it's accelerating. But when the market slows, those incoming streams of cash start to fall behind the growing arc of cash demands. Evergrande now has about 800 unfinished projects and there are about 1.2 million people waiting to move in.

Take one huge Evergrande project.  Prices for Evergrande's Venice properties (situated on the coast 90km from Shanghai) have tripled since sales began in 2012 and 80% of the apartments have been sold in total, though about one-third are unoccupied. But this year sales have slowed. Data from the Qidong municipal housing bureau shows around 60% of the apartments that went on sale have been sold, despite a 15% price discount. Evergrande has now discounted all its apartments by as much as 30% and it has also sought to raise cash through spinning off its stakes in other companies.

What Evergrande reveals is the end game of the huge urbanisation drive that started off to house China's people.  In a transformation of China's cities, the urbanisation rate surpassed 60% last year compared with 50% in 2011.  But because this urbanisation was eventually conducted by the private sector for profit and based on owner-occupation (90% of Chinese own their homes mostly without mortgages), residential property construction has become a financial asset investment, just as it was and is in the major G7 economies.  This 'financialisation' began in the late 1990s, when the government pursued a policy of making state-owned companies offload their residential assets to their employees – a Thatcher-type selling to council tenants.  The idea was that the private sector would look after housing, not the state, from then on.

So instead of housing "being for living in" (Xi), it has become a sector "for speculation" (Xi).  Apartments in China have become the investment vehicle of choice for people.  Few buyers purchase an Evergrande apartment as their primary residence. And Evergrande has explicitly catered to the better-off Chinese, choosing locations that fall just outside of areas that restrict the number of units a person may buy and advertising the developments as second homes. All over China, even sales clerks and factory workers are sitting on empty Evergrande apartments and dreaming of selling them at a big mark-up to fund their children's study abroad or their own retirement.

Property prices in coastal cities, where the best work and pay is, have doubled in the last ten years. In Shenzhen, the average apartment price has risen so much that some are finding it cheaper to live in Hong Kong, one of the most expensive property markets in the world. Since 2015, residential property prices have appreciated by more than 50% in China's largest cities. Over the past decade, average residential land supply per new resident in the top ten cities is only 230 square feet—little more than the size of a typical hotel room—or less than 60% of the average per capita residential space in China.

Speculation has been rife as local governments try to raise funds by selling land to developers which then build estates through borrowing at low rates often from the unregulated shadow non-bank sector. "Property is the single most important source of financial risk and wealth inequality in China," said Larry Hu, head of China economics at the foreign-owned Macquarie Securities Ltd. And he is right.

Much of the property speculation has been to build ever more commercial developments rather than housing. That's because the main prerogative for local governments is to accrue revenue. If they can attract more businesses into their jurisdictions and if those businesses become profitable, then the local government can collect more corporate taxes. At the same time, residential land supply is deliberately kept scarce so governments can make money on residential land sales. In effect, residential land sales serve as a cross-subsidy on local governments' pro-business land policy that sells commercial land cheaply.

The real estate sector now accounts for 13% of the economy from just 5% in 1995 and for about 28% of the nation's total lending. Given that local governments have $10 trillion in debt, land sales are the most crucial and reliable source of income for debt repayment. So any drastic changes would seriously raise the risk of local government defaults.

The private property sector's approach has relied on taking on large quantities of debt to accumulate more and more land — sometimes in speculative areas outside of major cities. In Evergrande's case, it has enough land to house the entire population of Portugal and more debt than New Zealand.  In 2010, it had just Rmb31bn ($4.7bn) in debt and had $190bn of properties under development as of the end of 2020.

The group's mounting credit woes have coincided with the change in government policy towards the "disorderly expansion of capital"; against big technology groups, the real estate industry and other sectors. The country's housing ministry announced a three-year inspection campaign to tighten regulation of the property sector. Last year, the government implemented a strict policy aimed at reducing developers' leverage, which China's banking regulator has labelled the country's biggest financial risk. The banks have been told to jack up mortgage rates. Local governments are being directed to accelerate the development of government subsidized rental housing and have been told to increase scrutiny on everything from financing of developers and newly-listed home prices to title transfers.

And in a classic case of 'financialisation', Evergrande financed its activities by issuing what are called 'wealth management products', in effect mortgage-backed bonds for foreign and Chinese retail investors to buy, paying high interest rates (7-9%).  Now the company is declaring its inability to meet these obligations. This uncontrolled expansion of debt by Evergrande and other property companies was ignored by China's regulatory authorities, just as it was in the US leading up to the property and financial bust in the global financial crash in 2008.

What is going to happen, if and when Evergrande goes bust?  Will other property companies crash too?; are we heading for a huge financial crash in China and possibly globally, sparked by the end of China's property boom?  Well, there are four other major Chinese property developers on the brink. The prices of the dollar bonds issued by these companies have collapsed on fears by international investors that those bonds cannot be refinanced when they mature, which would mean a default. So foreign investors in these bonds are taking a big ht.  And the ability of these property developers to issue new debt to raise new money to refinance has disappeared.

But in my view, there is not going to be a financial crash in China.  The government controls nearly everything, including the central bank, the big four state-owned commercial banks which are the largest banks in the world, the so-called 'bad banks', which absorb bad loans, big asset managers, most of the largest companies. The government can order the big four banks to exchange defaulted loans for equity stakes and forget them. It can tell the central bank, the People's Bank of China, to do whatever it takes. It can tell state-owned asset managers and pension funds to buy shares and bonds to prop up prices and to fund companies. It can tell the state bad banks to buy bad debt from commercial banks.  So a financial crisis is ruled out because the state controls the banking system.

But if not a crash, what about the property bust and the high levels of debt incurred?  Won't they reduce China's ability to grow at the pace previously achieved and targeted for the next five years?  Western economists are clear on this: the debt is so large and China's productive sectors are now so weak that even if China avoids a financial crash, the hit to household incomes and the profits of the capitalist sector are large enough to reduce investment and GDP growth.  China is heading for stagnation, if not a slump.

It's true that China has built up a debt mountain in recent years, of which property debt is a significant part.  Total debt hit 317% of GDP in 2020. But most of this debt is in domestic currency and is owed by one state entity to another; from local government to state banks, from state banks to central government. When that is all netted off, the debt owed by households (54% of GDP) and corporations is not so high, while central government debt is low by global standards. Moreover, external dollar debt to GDP is very low (15%) and indeed the rest of the world owes China way more: 6% of global debt. China is a huge creditor to the world and has massive dollar and euro reserves, 50% larger than its dollar debt.

Chinese leaders want to curb the debt level. But as I have explained before, controlling the debt level can come in two ways; either through high growth from productive sector investment to keep the debt ratio under control; and/or by reducing credit binges in unproductive areas like speculative property.  The latter would mean a reduction in the profitability of the capitalist sector in China and this would lower the potential for productive investment by that sector.  So the loss of profits and household income from property busts would add to downward pressure on growth of output and incomes.

But that forecast is based on the view that the Chinese government should continue to rely ever more on its capitalist sector to deliver.  And yet China's capitalist sector is in trouble in many ways just like in the G7 economies.  Profitability in the capitalist sector has been falling and is now at all-time lows; and much of its activities are increasingly in 'unproductive' sectors like consumer finance, property or social media. 

Again, as I have argued before, the basic contradiction of China's economy is not between investment and consumption, or between growth and debt; it is between profitability and productivity. The growing size and influence of the capitalist sector in China is weakening the performance of the economy and widening inequalities.  In my view, the Chinese economy is now strong enough not to rely on foreign investment or on unproductive capitalist sectors for growth.  Increasing the role of planning and state-led investment, the main basis of China's economic success over the 70 years of the People's Republic, has never been more compelling.

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Economic Sanctions: A Reality Check [feedly]

Economic Sanctions: A Reality Check
https://conversableeconomist.wpcomstaging.com/2021/09/22/economic-sanctions-a-reality-check/

Economic sanctions is an attempt to carry out foreign policy using economic terms. It is a deliberately broad term. It includes decisions about not trading certain products with certain countries or companies, or seeking to freeze the bank accounts of countries, companies, or individuals. In political terms, one main attraction of economic sanctions is that it addresses a demand to "do something" in foreign policy in a way that doesn't involve ordering soldiers into harms or imposing large budgetary costs. Thus, it's no surprise that sanctions are quite popular. What's less clear is whether they are effective.

Daniel W. Drezner makes a case for a degree of skepticism in an essay in the latest issue of Foreign Affairs, "The United States of Sanctions: The Use and Abuse of Economic Coercion" (September/October 2021). He writes:

Sanctions—measures taken by one country to disrupt economic exchange with another—have become the go-to solution for nearly every foreign policy problem. During President Barack Obama's first term, the United States designated an average of 500 entities for sanctions per year for reasons ranging from human rights abuses to nuclear proliferation to violations of territorial sovereignty. That figure nearly doubled over the course of Donald Trump's presidency. President Joe Biden, in his first few months in office, imposed new sanctions against Myanmar (for its coup), Nicaragua (for its crackdown), and Russia (for its hacking). He has not fundamentally altered any of the Trump administration's sanctions programs beyond lifting those against the International Criminal Court. To punish Saudi Arabia for the murder of the dissident Jamal Khashoggi, the Biden administration sanctioned certain Saudi officials, and yet human rights activists wanted more. Activists have also clamored for sanctions on China for its persecution of the Uyghurs, on Hungary for its democratic backsliding, and on Israel for its treatment of the Palestinians. 

We don't know much about how well these sanctions actually achieve a foreign goal. The limited studies on the subject suggest they are effective less than half the time. Moreover, the government actors who impose sanctions often don't seem to pay much attention to whether they work or not. Drezner writes:

A 2019 Government Accountability Office study concluded that not even the federal government was necessarily aware when sanctions were working. Officials at the Treasury, State, and Commerce Departments, the report noted, "stated they do not conduct agency assessments of the effectiveness of sanctions in achieving broader U.S. policy goals." 

Drezner argues that the promiscuous overuse of sanctions by the United States results from two factors: weakness and lack of imagination, which seem interrelated. The weakness is is that US dominance in world economic and military affairs is diminishing. For a number of foreign policy priorities, we want to do more than just give a speech, but less than order a military sortie. We settle on economic sanctions because we lack an ability to envision how foreign policy goals might be pursued in other ways.

There seem to be several conditions for economic sanctions to be effective: precise targeting, a realistic goal, and a degree of international cooperation. As an example, Drezner points out: "In 2005, when the United States designated the Macao-based bank Banco Delta Asia as a money-laundering concern working on behalf of North Korea, even Chinese banks responded with alacrity to limit their exposure." Some of the efforts to limit flows of funds to terrorist groups seem to have been effective, at least over the short- and medium-mterm.

But when the US, standing mostly alone, imposes sanctions for general purposes on large economies, the main effect is often to cause suffering to the people of the country, rather than actually to achieve a foreign policy goal. The international sanctions against South Africa may be the best example of a success story in assisting regime change. But economic sanctions that require a country to dismantle its existing political/economic arrangements are not likely to work well.

The United States has imposed decades-long sanctions on Belarus, Cuba, Russia, Syria, and Zimbabwe with little to show in the way of tangible results. The Trump administration ratcheted up U.S. economic pressure against Iran, North Korea, and Venezuela as part of its "maximum pressure" campaigns to block even minor evasions of economic restrictions. The efforts also relied on what are known as "secondary sanctions," whereby third-party countries and companies are threatened with economic coercion if they do not agree to participate in sanctioning the initial target. In every case, the target suffered severe economic costs yet made no concessions. Not even Venezuela, a bankrupt socialist state experiencing hyperinflation in the United States' backyard, acquiesced.

The Trump administration was quite aggressive in using economic sanctions to pressure China for economic and foreign policy goals. That policy does not seem to have been effective.

Similarly, the myriad tariffs and other restrictive measures that the Trump administration imposed on China in 2018 failed to generate any concessions of substance. A trade war launched to transform China's economy from state capitalism to a more market-friendly model wound up yielding something much less exciting: a quantitative purchasing agreement for U.S. agricultural goods that China has failed to honor. If anything, the sanctions backfired, harming the United States' agricultural and high-tech sectors. According to Moody's Investors Service, just eight percent of the added costs of the tariffs were borne by China; 93 percent were paid for by U.S. importers and ultimately passed on to consumers in the form of higher prices.

Indeed, it seems to me that we have often developed an odd vocabulary in talking about economic sanctions, where we refer to them as "success" when they cause disruption or stress, not when they actually succeed in accomplishing the foreign policy goal that they were purportedly enacted to address.

I'm reluctant to opine much on foreign policy. It's not my area of expertise. But even I understand that building and projecting America's interests needs to be a broad-based project that involves more than just imposing economic and military costs on others, but also includes building connections and offering carrots. Thus, foreign policy can work with economic policy on issues of building trade relations, encouraging investment flows, and providing loans or aid. Building the connections between nations that offer a degree of leverage in foreign policy can also use other tools: cultural exchanges, travel between countries, communication and consultation between governments, helping with training and expertise, and a range of treaty alliances on smaller issues. Individually, many of these are small steps. But together, they build up a reservoir of understanding and connectedness, so that when the tougher and bigger issues come up, US foriegn policy goals have a greater chance to succeed.

Drezner reports that Treasury Secretary Janet Yellen has promised to carry out a review of the US use of economic sanctions, which seems overdue. Acting as if economic sanctions are an appropriate part of almost every foreign policy goal, and then watching as other countries do the same in pursuit of all of their own foreign policy goals, doesn't seem like a pathway to make the world a safer or more flourishing place.

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Millions Still Months Behind on Rent After Eviction Moratorium Ends [feedly]

Millions Still Months Behind on Rent After Eviction Moratorium Ends
https://www.cbpp.org/blog/millions-still-months-behind-on-rent-after-eviction-moratorium-ends

Weeks after the federal eviction moratorium ended, the latest Census data show an estimated 9.9 million adult renters are living in households at least one month behind on rent, and over 4 in 10 adults behind on rent believe eviction is at least somewhat likely in the next two months. States and localities must act swiftly to protect millions of these renters from losing their homes by employing eviction diversion programs that provide legal representation and help emergency aid reach households struggling to pay rent. And Congress can help prevent future eviction crises by including a major expansion of the Housing Choice Voucher program in recovery legislation to make housing safe and affordable for people most at risk of eviction.

The Supreme Court in late August rejected the last in a series of eviction moratorium extensions by the Centers for Disease Control and Prevention (CDC). And in the two weeks ending September 13, nearly 3.7 million adult renters reported being in a household that was one month behind on rent, data from the Census Bureau's Household Pulse Survey show. Over 2.8 million were two months behind, another 1.2 million were three months behind, and, representing the most severe cases, 2.2 million adult renters reported that their household was four or more months behind on rent. (See graph.)

The number of adults behind on rent has fallen from a January 2021 peak of 15 million people but has remained above 10 million people since the end of March. An estimated 11.9 million adults living in rental housing were still not caught up on rent in early September, and the vast majority of them (9.9 million) were in households one or more months behind. Over 4 in 10 of those behind on rent, 5 million, believe eviction is somewhat or very likely in the next two months.

 

Chart

The Supreme Court's ruling creates a particular risk of eviction for families still recovering from the pandemic's economic fallout. Renter households with a COVID-related job loss owe an average $8,200 in back rent, the Federal Reserve Bank of Philadelphia estimates. While a patchwork of state and local moratoriums remains in parts of the country, most people behind on rent now have no protection against being forced from their homes. Some 53 percent of renter households live in states and localities without any form of eviction moratorium, according to the Urban Institute.

While in place, the CDC moratorium provided critical protections for renters accruing debt from back rent and late fees due to COVID-19, effectively averting a surge in evictions. Princeton's Eviction Lab estimates that the CDC moratorium helped prevent 1.55 million evictions nationwide over the past 11 months. As national protections lapse, the imminent wave of evictions will disproportionately displace Black and Latino renters, reflecting unequal access to stable housing due to longstanding racial disparities in education, employment, and housing opportunities.

The December relief package and the American Rescue Plan included over $46 billion in emergency rental assistance, but only a fraction of the funds has reached households struggling to pay rent. Many states and localities didn't have systems in place to distribute these funds, preventing much of the aid from quickly reaching renters in need. As of August, 30 percent of the initial $25 billion tranche of funding has been spent, latest Treasury data show. Over 1.4 million households received emergency rental assistance between January and August 2021, leaving millions of renters behind on rent still at risk of eviction. Adopting emerging best practices, such as simplifying application processes by increasing documentation flexibility and engaging landlords to boost program participation, would accelerate distribution of emergency aid to at-risk renters.

Protecting households from the immediate eviction crisis requires swift action, including rapid distribution of remaining emergency aid along with the implementation of broader eviction diversion programs. Beyond that, a major expansion of the Housing Choice Voucher program is the single most important way to help people with low incomes afford housing on an ongoing basis and to prevent future eviction spikes following economic and public health crises. Congress has an opportunity to sharply expand the voucher program and other needed housing assistance through Build Back Better legislation, a step that would reduce housing instability and homelessness while also strengthening other recovery agenda investments. Doing so is imperative to ensuring all people have safe and affordable housing.

TOPICS: 

POVERTY AND INEQUALITY, HOUSING

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Two-thirds of low-wage workers still lack access to paid sick days during an ongoing pandemic [feedly]

Two-thirds of low-wage workers still lack access to paid sick days during an ongoing pandemic
https://www.epi.org/blog/two-thirds-of-low-wage-workers-still-lack-access-to-paid-sick-days-during-an-ongoing-pandemic/

According to a new report released yesterday from the Bureau of Labor Statistics (BLS), just over three-quarters (77%) of private-sector workers in the United States have the ability to earn paid sick time at work. But, as shown in Figure A below, access to paid sick days is vastly unequal, disproportionately denying workers at the bottom this important security. The highest wage workers (top 10%) are nearly three times as likely to have access to paid sick leave as the lowest paid workers (bottom 10%). Whereas 95% of the highest wage workers had access to paid sick days, only 33% of the lowest paid workers are able to earn paid sick days.

Low-wage workers are also more likely to be found in occupations where they have contact with the public—think early care and education workers, home health aides, restaurant workers, and food processors. Workers shouldn't have to decide between staying home from work to care for themselves or their dependents and paying rent or putting food on the table. But that is the situation our policymakers have put workers in. Meaningful paid sick leave legislation is incredibly important for low-wage workers and their families and important to reduce the spread of illness. At the same time, access to paid sick days has positive benefits to employers as it reduces employee turnover with no impact on employment. 

Figure A

The ability for workers to earn paid sick days varies greatly across the country. In lieu of federal action, many states have passed legislation to guarantee paid sick days, but many workers have been left behind. Figure B shows vast differences across Census divisions in workers' ability to use paid sick time to take care of themselves or their family members. The share with access to paid sick days ranges from only 67% in East South Central states (composed of Alabama, Mississippi, Kentucky, and Tennessee) up to 95% in the Pacific states (California, Oregon, and Washington). Notably, many local municipalities in the East South Central region have been preempted by their state governments from passing paid leave and sick day policies.

Figure B

The latest BLS data also show that full-time workers are more likely to have access to paid sick days than part-time workers (87% versus 48%). Workers in larger establishments are more like to have paid sick days than workers in smaller establishments; 91% of workers in establishments of 500 workers or more have paid sick days compared with 68% of workers in establishments with fewer than 50 workers.

Union workers are also more likely to be able to stay home when they are sick because they are more likely to have access to paid sick leave: 87% of unionized workers can take paid sick days to care for themselves or family members, while only 76% of nonunion workers can.

Policymakers can choose to act to eliminate the disparity in access to paid sick days. Federal legislators can require employers to give workers the opportunity to earn paid sick days to stay home to care for themselves or families members when they are sick, which will increase their economic security and reduce the spread of illness at work and at school, particularly important during an ongoing pandemic.

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PK: Why the Child Tax Credit Should Be Permanent [feedly]

Why the Child Tax Credit Should Be Permanent

Paul Krugman

text only
https://www.nytimes.com/2021/09/21/opinion/child-tax-credit-poverty.html

Americans love rags-to-riches stories, tales of people who transcended childhood poverty to achieve adult success. Unless you're totally oblivious to reality, however, you surely realize that such stories are the exceptions, not the rule. The disadvantages of growing up in poverty — poor nutrition, poor health care, an impoverished environment, the cognitive burden that goes along with never having enough money — can and often do hobble children for the rest of their lives.

That much is or should be obvious. What you may not know is that economists have actually quantified the damage from childhood poverty.

You see, America's anti-poverty programs, such as they are — notably food stamps and Medicaid — weren't rolled out all at once. Food stamps became available in some parts of the country earlier than in other parts; so did Medicaid, which was also expanded in a series of discrete jumps. This stuttering, haphazard approach to helping poor children amounted to an unintentional form of human experimentation: We can compare the life trajectories of Americans who received crucial aid as children with those of their contemporaries or near-contemporaries who didn't.

And a number of researchers, notably Hilary Hoynes and Diane Whitmore Schanzenbach, have used this evidence to show that childhood poverty has huge adverse effects.



Last week almost 450 economists, led by Hoynes and Schanzenbach, released an open letter to congressional leaders making this point. "Children growing up in poverty," the letter declares, "begin life at a disadvantage: on average they attain less education, face greater health challenges, and are more likely to have difficulty obtaining steady, well-paying employment in adulthood."

In response, the letter calls on Congress to lift millions of children out of poverty by making permanent the 2021 expansion of the Child Tax Credit, which gives most parents $300 a month for every child under 6 and $250 a month for each child aged 6 to 17.

This is a really good idea. In fact, it's such a good idea that those trying to find arguments against it have really been scraping the bottom of the barrel.

Are you concerned about the cost? Right now, with interest rates near record lows, is a time when America should be investing in its future — and lifting children out of poverty is every bit as real an investment as repairing roads and bridges. Indeed, the evidence for a big economic payoff to spending on children is a lot stronger than the evidence for high returns to spending on physical infrastructure (although we should be doing that too).

In fact, the returns to aiding children are so high that the cost would probably be minimal even in narrowly fiscal terms — because helping children grow up into more productive, healthier adults would eventually mean higher tax receipts and lower medical outlays. Unlike tax cuts for the rich, aid to poor children would largely pay for itself.

E

Are you worried about work incentives? Unlike many anti-poverty programs, which fade out quickly as income rises — and therefore have some negative effect on work effort (although this effect is probably exaggerated) — the Child Tax Credit would still be available to middle-class families. So the disincentive effects would be minimal.

Oh, and the suggestion that the tax credit be tied to a work requirement is a really terrible idea, both morally and practically. The goal here is to help children get a fair chance in life; do we really want to punish them for the sins, if any, of their parents? And adding work requirements would mean placing an onerous paperwork burden on precisely the people least able to deal with it; remember, one of the major costs of poverty is the cognitive burden it places on the poor.

Basically, there are no good arguments against making the expanded Child Tax Credit permanent. Opposition comes down either to a visceral dislike for any government program that helps the poor or to a desire to perpetuate a system that not only keeps the poor poor but condemns their children to the same fate. And America is supposed to be better than that.


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