Jeonju head office, Pension Fund Headquarters.
The headquarters chief stood with his arms crossed, deep in thought for a long while, then picked up the internal phone.
“Tell all the division chiefs to come to my office.”
Even after he hung up, his grave deliberation continued.
It had already been a week since he had received contact from China. In an urgent voice, Director Oh had warned him of a crisis in Chinese real estate and said they had to sell off everything in stages, from bonds to stocks.
Since then, the headquarters chief had not had a single proper night’s sleep.
At present, the pension fund had invested 2 trillion won in industries related to Chinese real estate. It was too large a sum to dispose of all at once.
-Chief, all the division chiefs have gathered.
Once the company executives had all assembled, the headquarters chief asked the overseas bond team.
“How did it go with the bond team?”
“Yes... As you instructed, we sold off all the Chinese construction company bonds for now.”
“The loss?”
“About 10%.”
The air in the conference room sank heavily.
The pension fund had invested roughly 500 billion won in Chinese construction company bonds... A 10% loss meant 50 billion won had vanished.
“Then only the stocks remain.”
But there was still a bigger task left.
Namely, the 1.5 trillion won directly invested in Chinese construction firms.
“Before we discuss this, I’ll say this first. I did receive Director Oh’s report, but that doesn’t mean I trust all of its contents.”
-Yes...
“There probably isn’t a single country whose real estate market hasn’t been smashed by high interest rates from the U.S. Then, among them, is China especially more serious... I’m still fifty-fifty on that. Investment Strategy Office, how is Europe right now?”
At the headquarters chief’s question, the investment director opened his mouth.
“To be honest... I don’t know if it’s particularly more serious. I even think selling the bonds at a 10% loss may have been a hasty decision.”
“Why?”
“The Bank of England and the ECB couldn’t hold out this time. When Pabil hinted at a rate hike, they hinted at hikes of the same level. It’ll tear them apart, but it seems they can’t defend their exchange rates otherwise.”
“So you’re saying you see Europe and Chinese real estate as being in similar positions?”
“Honestly, yes. If Europe raises rates, real estate there will likewise flash red. In that situation, is Chinese real estate particularly more dangerous... I’m not sure.”
-Chief, I feel the same. We can say the bonds were disposed of as part of risk management. But we have to defend the Chinese construction company stocks.
“Good. What about the domestic team?”
The next speaker was the head of the domestic division, Kim Myeongcheol.
“Compared to Europe, we have a little more breathing room. Despite the Korea-U.S. interest rate gap, the exchange rate is holding up surprisingly well, and domestic inflation is at a controllable level. If Governor Shin had intended to follow the U.S. and raise rates, he would have sent the market a signal in advance.”
“There won’t be any change in domestic rates?”
“Yes. I think the Bank of Korea will hold out without raising them.”
The struggle to endure through COVID had been worth it.
Among major countries, Korea was the country that spent the least fiscal money during COVID. The U.S. released fiscal spending equivalent to 25% of GDP, while the U.K., France, Germany, Italy, and others poured in roughly around 10%. Korea defended itself in the 5% range.
Thanks to that, it was holding firm like a reef even amid the tsunami of high interest rates from the U.S.
At the Fed’s announcement of a big step, all of Europe had reluctantly raised rates through gritted teeth, but the possibility of Korea raising rates seemed low.
“Nevertheless, the domestic real estate cold wave is expected to continue for quite a long time.”
The headquarters chief looked over the legislative office materials Kim Myeongcheol handed him and fell into thought for a while.
All the division chiefs gathered here were saying the same thing. Real estate around the world was in a recession.
Europe, swallowing its tears as it raised rates, and Korea, which was at least holding its own, both had grim outlooks. When everyone was this bleak, could Chinese real estate alone be seen as especially more problematic?
“Understood. You’ve all worked hard. As for the bond sale, we’ll say we cut our losses for risk management, and I’ll think hard about selling the stocks too. Everyone return to your posts and keep an eye on the market.”
-Yes, understood.
After everyone had left, only the head of the Risk Management Division, the headquarters chief’s closest aide, remained.
The headquarters chief folded his arms tightly and looked out the window.
“Director Choi. Do you think the same? Was it my mistake to sell the Chinese construction company bonds?”
“No investment can be bought at the very bottom and sold at the very top. From a risk management perspective, that was a decision you could more than reasonably make.”
“Then you’re against selling the Chinese construction company stocks too?”
“Everyone except Director Oh is reporting the same thing, aren’t they? Real estate is difficult all over the world. It isn’t just China.”
“I’m saying this because I think differently.”
“...Pardon?”
“I think Director Oh’s view from the field is correct. Other countries may be struggling too, but China is especially worse.”
“Ch-Chief.”
The headquarters chief held out a report.
“Director Choi, suppose there’s a country with an overwhelmingly high rate of violent crime. But then that country announces its murder rate is low. Would you be able to trust that statistic?”
“...Pardon?”
“This is the global data Director Oh sent along with his report. For the past three years, every ratings agency has been concerned about China’s economic slowdown. So how is China claiming there’s nothing wrong with its real estate?”
Faced with three years’ worth of data, the risk chief could not refute a single word.
“Employment indicators are the worst, youth unemployment breaks records every year. With the birth restriction policy combined with a low birthrate, future indicators are bleak as well. And yet there really is no problem with real estate?”
“...Chief, do you also think they tampered with the statistics?”
“Would it be limited to statistics? I suspect the economic growth rate is distorted as well.”
In truth, if China’s economy were steadily showing growth in the 9% range as it had for the past forty years, real estate would not be a major problem.
Short-term oversupply was something every country experienced from time to time. If China continued to show high growth, real estate would trend upward anyway, so it would be a problem that would soon resolve itself.
But the headquarters chief had doubts about China’s potential growth rate itself.
Would China really continue to show high growth going forward? Or perhaps the economic miracle it had shown until now had been an artificial growth rate written with real estate oversupply?
“No matter what, a country on China’s level won’t collapse that easily...”
“When the Soviet Union fell, it fell overnight.”
“...”
“Only after it collapsed did its economic contradictions reveal themselves all at once.”
The risk chief could add nothing. The resolute expression on the headquarters chief’s face said he had already made up his mind.
“Sell.”
The headquarters chief rose from his seat.
“This is a decision made from a risk management perspective. Sell 50% of the Chinese construction company stocks by the end of this week.”
The head of the Risk Management Division let out a short sigh.
The Chinese construction company assets currently held by the pension fund amounted to roughly 1.5 trillion won. If they cleared out as much as 50% of that within a week, losses were inevitable, and they would not be able to avoid uncomfortable misunderstandings from other institutions either.
*
The chairman of the Standing Committee, the equivalent in Korea of the Speaker of the National Assembly, stormed toward the Statistics Bureau, snorting with rage.
China’s greatest political event, the Lianghui (两会), had concluded very successfully, but today he was in an extremely foul mood.
When he arrived, the Statistics Bureau executives were already gathered in one place, and perhaps because they had already sensed their fate, they had the eyes of cattle being dragged to the slaughterhouse.
“Where is Director Li Xiong?!”
No sooner had he finished speaking than Director Li Xiong entered.
“What happened? Report everything, without leaving anything out!”
Director Li Xiong hesitated for a moment. Over the past fifteen days, nuclear bombs had gone off at the Statistics Bureau day after day. Where on earth was he supposed to begin?
After searching his memory, he spoke as if he had given up.
“...Fengda, Wanke, and Bigui Group are effectively bankrupt.”
“What?!”
“Their loans matured fifteen days ago, but all three groups failed to repay the money. As a result, the banks that extended PF loans to those three groups have had their funding dry up, and those banks have currently gone to the People’s Bank of China to request loans.”
The Standing Committee chairman felt the world go dark before his eyes.
Real estate did not simply end with whether apartments were built or not. Loans from countless banks were entangled in it, and that would soon lead to the wrecking of the financial economy.
“Why on earth?!”
“Because of unsold units. They were unable to recover funds due to unsold apartments in the provinces. There are several parcels of land held as collateral, but with the recent decline in land prices, they are nowhere near enough to repay the debt.”
The Standing Committee chairman’s hands trembled.
“...It can still be handled, can’t it? If the People’s Bank lends them money?”
“It seems unlikely.”
“What?”
“Because the Fed raised rates, the People’s Bank has no choice but to raise rates as well. They said they must withdraw market liquidity in order to defend the exchange rate... and that it would be difficult to release money.”
The Standing Committee chairman collapsed into his seat.
When the U.S. had driven SB into bankruptcy, he had laughed until he held his belly.
When global society suffered a downturn from the subprime crisis, China had been a country that instead enjoyed a boom. This time as well, if the U.S. was preoccupied putting out the fire in its own house, it seemed worth aiming to overtake them in GDP by seizing the opportunity.
But to think that house fire would spread to our house...
Yet the bad news did not end there.
“And there appears to be an institution that has noticed our situation.”
“Wh-what?”
“The pension fund... that is, Korea’s sovereign wealth fund, has sold roughly 700 billion won in assets over the past week. All of them were our construction company stocks, so construction shares have been falling day after day.”
“What on earth...”
“But judging from the pension fund’s selling trend, they seem to be considering selling everything.”
The Standing Committee chairman sprang to his feet again.
“Are you saying information leaked? Who was it? Which bastard sold out the country?!”
“Chairman. That isn’t what matters right now. We need to bankrupt the three groups as quickly as possible.”
“Wh-what?”
“Right now, they’re turning scraps of paper into money. The amount they take out is money our government will have to repay.”
“What is this...”
“In truth, several institutions had already been watching the actual state of our real estate market. Since Korea’s sovereign wealth fund has moved first, other institutions that had been wavering will join in the dumping. Then the money we have to repay will only snowball further.”
Every hour was urgent. No, every minute and second was urgent.
If they did not acknowledge capital impairment and turn the stocks into scraps of paper, all sorts of institutions would come shake them down for their cut. At this point, even manipulating the authorities’ statistics was meaningless.
The Standing Committee chairman approached Director Li Xiong, who was half out of his mind.
Then he immediately kicked him in the shin.
-U-uaagh!
“You useless parasite. You’re only telling me something this serious now?!”