A fortnight ago (really, only 14 or so days?), someone contacted me about buying some of my photographs after noting something I had posted on Threads. A similar tantalising suggestion reached me last summer as well from a ‘woman’ who saw my work on Twitter. After hearing the current ‘guy’ did not care which photographs but that ‘he’ was ‘authorised’ to spend $5,000 each for 4-6 of them, I knew this was a scam again.
Yes, when this happened in August, I did some research on the mechanism by which ‘she’ (in that case because who knows who is really behind any account on social media) wanted us to link for the same purpose. It was a heady feeling that someone would pay me so much for something I so enjoyed but I hadn’t yet discovered, again via social media, how common this scam. I sadly expected from the minute I opened the message it wasn’t real but a few minutes of fantasy was good for the ego, I guess.
The event week before last was smoother. ‘He’ did not press as hard but, when I told him I knew it a scam, asking why he would pay that kind of money for as yet unidentified photographs, the response was ‘I sell photographs and art so I do these things.’ It was at least an immediate comeback but I deleted the exchange, blocked the account, and went upon my merry way.
It seemed too good to be true because it was too good to be true. It’s heartening to trust my own instincts (ok, inherent skepticism) about things but one is never certain it’s the right call. After all, we hear about some fabulous decisions that lead to all sorts of superb outcomes in seemingly unfathomable circumstances.
For those of us who have small bank accounts or don’t dabble with the stock market, there is an awe—even if we detest them— about those who make what seems like superb decisions investing with phenomenal gains. Not always.
Today’s Wall Street Journal, however, had a terrific piece about the application by big money folks to the ‘common sense’ adage. The 2016 tale recounts how a hedge fund manager could not get a meaningful answer about how the Goldin Metropolitan development in the metropolis of Tianjin, east of Beijing. The apartments this hedge fund guy saw were expensive and grandiose on a scale that made him stop. The selling agent explained that potential buyers’ interest in polo, since the facility was near a polo pitch, would draw them in. After he heard that, the hedge fund manager stepped away from the property as far and quickly as possible, investing against the very project.
Similarly, a couple of accountants visited China to examine the financial health of the property market coincident with the hedge fund manager’s experience. Questions were beginning to arise about the viability of Evergrande’s projects across the Middle Kingdom so these two flew in from Hong Kong to see for themselves, rather than accept that the Chinese government’s actions to quash any concerns had been entirely successful—or warranted.
These guys wondered about the Evergrande accounting that listed a particular project (one of sixteen they checked in person) in the far northeast as a performing asset, accounting-speak for financially solvent at the time. The company had been audited so most investors were satisfied with the conditions as seen on paper. What the men noticed, however, was the parking garages with 400,000 spots were nearly empty even though the audited account statement indicated the spaces were being sold at $20,000 a pop, thus valued at $7.5 billion in aggregate. The Journal quotes them as projecting ‘[t]he company is insolvent by our reckoning, and its equity worth nothing…Auditors asleep’.
To cut to the quick, property prices still rose in the immediate couple of years following both of these anecdotes but by five years later, Evergrande was openly on the road to bankruptcy. Chinese officials accused the company of overstating its sales in 2019 and 2020 alone by $78.4 billion. Similarly, Goldin Financial, the owners of the aforementioned property project in Tianjin, left a building shell without any residual hint of the bankrupt enterprise once claiming that interest in polo games would draw sufficient ownership to justify the community under development physically larger than Monaco.
The point is that understanding the fragility, if not complete fantasy, of China’s vast property bubble did not require much more than serious questions about basics. Of course other serious investors might dispute that they could have foreseen the problems but many red flags were available. One has to ask whether Bernie Madoff’s annual ability to garner returns on investments so much higher than the stock market wasn’t a similar indicator. Too many did not ask in either case.
The difference between just these two cases is that often, although not in Evergrande’s instance, the CCP will decide to absolve the company of its failings by providing cash infusions to ‘right’ a project. In a non-transparent system such as China’s, one has to assume Evergrande’s leadership got crosswise with Party officials. The nature of a political system built largely on guanxi, relationships or network of associates rather than replicable rule of law, complicates and obscures what really occurs in a way far more difficult to predict than in our own.
We pride ourselves on letting the market decide the viability of most projects. These particular instances, in addition to the overwhelming majority of the Chinese property decisions, would definitely have fallen aside if the hand of the marketplace were allowed to work. But, don’t be confused: our goal is a system with relatively self-sustaining enterprises. China’s goal is to assure societal calm. Those are fundamentally different objectives.
At the same time, we need remember that real estate was not the entirety of China’s economy. As I whined to my television following a statement by Democratic Congressman Seth Moulton a couple of months ago during the Tiktok debate when he indicated China’s economy was in free fall, the Chinese economy is not on death’s doorstep. It is no longer growing at stratospheric rates. Real estate is definitely weak but exports are climbing again. The real estate market is not the same as the Chinese economy, although too often we seem to conflate that these days as Admiral John Aquilino of US Indo Pacific Command did earlier this week.
I don’t trust the granularity of Chinese figures so I think they have been inflating many numbers over the years but I don’t think the evidence is that they are failing altogether. We wish but overdrawing their woes won’t help us. We need be analytical as best we can so we are reasonable about what resources and trends Beijing confronts—as we should about ourselves.
Seeing that arguments—in this case by the project managers selling properties—had logical inconsistencies was vital and inexcusably ignored by outside investors. The same principle applies to any case in any field, however. If you can’t see how pieces reach a logical endstate, stop. Either figure out what you are missing or reconsider immediately. It can be a loss less expensive than diving in with hope as your sole instrument.
I wish I had always followed my own advice but I too have missed obvious signs, gi-normous (as a reader wrote me this morning in an email message) or otherwise.
Thoughts? Similar examples? Counter examples? I welcome any and all suggestions, rebuttals, questions, or comments. Or, have I got it all wrong?
Thank you for considering ACC today. I appreciate each and every one of you. If you find this of value, please feel free to circulate it. Thank you especially to the subscribers.
Be well and be safe. FIN
Rebecca Feng, ‘The Folly of China’s Real-Estate Boom was Easty to See, but No One wanted to Stop it’, WSJ.com, 24 April 2024, retrieved at https://www.wsj.com/real-estate/china-real-estate-bubble-bust-35a2b7db?mod=real-estate_trendingnow_article_pos3
Pete Landers, ‘China’s Economy is '“Failing”, U.S. Indo-Pacific Commander Says’, WSJ.com, 23 April 2024, retrieved at https://www.wsj.com/world/asia/chinas-economy-is-failing-u-s-indo-pacific-commander-says-b747f3af?mod=Searchresults_pos1&page=1