Evergrande -- Another Uneducated Opinion
But I'll try and keep it short
By now you’ve probably heard of Evergrande. If you haven’t think of it as a sort of Berkshire of China. Less the Cash Cow Businesses and with far less competent management. It’s a real estate group that got itself involved in Sports, Entertainment, EVs, etc. but at it’s core, it’s a real estate developer that mingles in both residential and commercial property. Oh and it’s also about to default on its debts.
It’s balance sheet shows over 250B USD in current liabilities, a significant part of which is comprised of debt. It’s a company with nearly 300B in assets…but 90% of which are illiquid. It’s highly levered and it’s been told by the ruling party…don’t expect a bailout.
Twitter is loaded with opinions, most of which I find to be completely uninformed and absolutely devoid of any research or any real thought. Here are a couple of takes.
Stocks Don’t Go Down…Buy the Dip Already!
This is 2008 all over again!
China will bail them out!
I took a few hours to research, read and think about what scenario plays out here. This is my opinion:
The ruling party of China will not bail out Evergrande, nor any banks (particularly shadow banks) which take massive losses as a result. They may provide some assistance to prevent banks from going under if necessary, or they may take over the banks completely.
The ruling party of China will do everything in it’s power to stabilize the property market and make whole any employees or working class individuals caught up in this mess.
The ruling party of China will not bail out any Chinese billionaires who are caught up…in fact…they could very easily seize and liquidate personal assets of management in an attempt to make whole the working class.
Any foreign debt holders (Evergrande has foreign currency bonds) will walk away empty handed for lack of recourse.
The biggest losers in this situation is foreign markets…and there is nothing they can do about it.
The basis for my opinion is predicated on a few key points.
China has already said they won’t bail Evergrande out. The ruling party will not even allow itself to be seen as capitulating. This would be a sign of weakness and would be out of the question. If any banks overly stretched themselves by lending to Evergrande…I’d expect the CCP to consider seizing the banks, trimming any assets and injecting liquidity to stabilize the system.
China will prioritize stabilizing the real estate market which is the highest risk for internal contagion. Their second priority will be to make whole the workers (they were forced to lend money to their employer earlier this year by upper management) as well as homeowners/purchasers (some have made deposits on unfinished houses).
The CCP is built on the ideals of peasants and workers (thus the scythe and the hammer in the flag). Historically when elitism and corruption penetrates communism this creates discontent which leads to revolt. CCP is too smart to bail out the billionaires. Unlike the West which is built around financial institutions, the East is built on labor. CCP has already shown by its attacks on some of it’s largest and most valuable companies earlier this year that it is trying to fight the inequality which plagues the West right now.
There is a slight risk for contagion in foreign markets. I don’t believe it will be systemic…but you will have some investors exiting empty handed. As foreign investors will have no recourse on the properties owned by Evergrande…their only recourse is towards financial assets. I find it highly unlikely that CCP will allow those financial assets to go anywhere but to the state or the people. Additionally I suspect the CCP will go after the higher ups for financial damages liquidating them of their assets. Between banks and the wealthy obviously some foreign assets will be owned. What this means for foreign markets is uncertain.
Exactly what the implications will be for foreign markets, nobody can say for any certainty. I think they will likely take longer to play out then we expect, and any attempts to predict them will be in vain.
The sector of the market which would concern me most is the financial sector. They would have the most exposure to Chinese and Pseudo Chinese (Hold Co) Assets. The biggest risk is that foreign banks were leveraging against Chinese Real Estate bonds. Especially if they were leveraging into derivative products. I find it unlikely that this will be the case but wouldn’t write it off. Also companies and banks with high exposure to Chinese currency risk could see some problems if they aren’t hedged as liquidity injections will most certainly devalue the Yuan.