Bubble From Beijing
China’s role in market’s tumult
STOCK markets are plummeting, with Dow 20,000 just as likely as Dow 30,000.
Everyone knows that one culprit is higher interest rates — or, at least, detectable ones — after a decade of easy money. But there’s a source of easy money whose disappearance could create a feedback loop that pushes markets down further and endangers the “real” economy: China.
Until the past 15 years, China didn’t investment much in America. It didn’t have much money to invest.
In the year 2000, China sold $249 million worth of products to the rest of the world, according to the Congressional Research Service. Last year, it exported $2.3 trillion.
Despite President Trump’s promises to the contrary, America’s trade deficit with China hit a record high. That’s because, with a few high-profile exceptions, most of our economic recovery consists of doing what we’ve done for decades. Americans borrow money — smashing another record re- cently, with $1 trillion in credit-card debt — to buy imported goods.
Much of the money we’ve exported has come back in the form of investment in the past half-decade, pushing up our stock and bond prices and, most of all, realestate prices.
Three Chinese companies — Anbang, Dalian Wanda and HNA — were responsible for much of the buying, snapping up everything from the Waldorf-Astoria hotel to the AMC Loews movie chain.
Just last month, a fourth Chinese company, Greenland USA, announced it would buy almost all of the apartment-and-office-space project that is supposed to be part of the Barclays Center development from Forest City Ratner, increasing its stake from 70 percent.
Greenland is behind the times. The bigger companies are now selling, not buying. Anbang, for example, only bought the Waldorf in 2015, for a record $2 billion, and now it may be for sale again.
As Bloomberg reported this month, Anbang has to figure out which of its high-priced trophy assets, from the Essex House hotel on Central Park South to the 717 Fifth Avenue office building, it wants to dump.
HNA, too, is selling, not buying, Reuters reports. In the United States, it needs to shed at least $4 billion, after just buying the 245 Park Ave. office building last year for $2.2 billion, another record. Wanda, too, is ending real-estate projects from Los Angeles to Chicago.
Trump’s own family is feeling this change. Last year, Anbang was about to put $400 million into the Kushner family’s office tower at 666 Fifth, but pulled out.
Why the abrupt shift? A big reason is debt: HNA, for one, borrowed so much that it can barely pay its interest costs. And remember, that’s while rates are still low.
Chinese companies increased their borrowing from $3 trillion a decade ago to nearly $20 trillion today, the Congressional Research Service says. What happens if rates rise significantly, making it harder to refinance that debt?
Why do Chinese companies owe so much, anyway? China, with those huge surpluses, is supposed to be lending the rest of the world money, not borrowing it.
All of which suggests a bubble mentality: These companies at first used their own money to inflate prices around the world. They then figured that if they bor- rowed, they could do even better.
Chinese companies were never the dominant players in US holdings — in 2016, according to the American Enterprise Institute, they invested about $54 billion, mostly in coastal real estate.
But their willingness to overpay made them an important player: Jared Kushner, then in charge of the company, likely overpaid for the 666 Fifth Tower a decade ago, at $1.8 billion, but the Chinese would have valued it at nearly $3 billion last year.
So if a Chinese company buys the office building down the street, it makes the one up the street seem more valuable, influencing other buyers.
Now, the whole world knows that HNA, Anbang and Wanda must sell, and fast. Anyone buying their properties is going to want them for less than the recent sale prices. And if such buyers depend, too, on debt, they’ll have less such debt to buy with if rates continue their climb.
Chinese buyers — as well as other foreign investors, like staterelated entities in the Middle East — helped push prices higher on the way up. It stands to reason that they could help push prices lower on the way down.
And then, we’ll have an experiment: Can the economy grow even as asset prices that are supposed to reflect that economy go through what is delicately called a “correction”? Theoretically, yes, but history suggests otherwise.