Skip to main content

EverGrande -- the wheels are starting to fall off

 On Friday, September 9, 2022 the headquarter of Evergrande in Hong Kong was seized by foreign creditors.  It is possible that the Chinese government decided that it was not worth the trouble to fight for that one piece of real estate, especially if it was owned by a single creditor (unknown at this stage). 

My Friends in China tell me that the government is fully aware of the scope of the problem they face with mainland real estate and are threading a needle.  The problems are several, but the first and most important is the deal to restructure Evergrande which will be the blueprint for the other Chinese real estate companies that are facing nearly identical cash flow problems.

The amounts are too large for the state to absorb.  Evergrande's total debt outstanding is around US$ 300 billion.  Evergrande is not the largest real estate developer.  The 300 billion is used as equity in projects worth between 5 and 10 times that amount.  These are the borrowings from ordinary Chinese that have purchased apartments that have yet to be completed. The Chinese problem is that if it makes the bondholder whole (and they do have a priority call on the assets of Evergrande), the Chinese government has to consider that it would also have to make whole the individual investors -- that have purchased the units yet to be built.

Factors that China must consider:

  1. How much money are we talking about
  2. What percentage of bondholders are really foreign
  3. How many more developers are in trouble
  4. How will bank lenders react

These are all tied together.  (1) There is no concept of audited accounts in China, there are no auditors so the Chinese government has to send its own teams to each company and figure out where things stand.  That takes time, and China is running out of time (re. the seizure of Evergrande's headquarters in Hong Kong is an example).  (2) Many Chinese have used foreign accounts to invest in China -- as a way of reducing mainland exposure and these may be powerful interests -- again unknown, but this is Chinese wealth that would also be destroyed.  (3) The crux of the Evergrande restructuring, is the total numbers, and the Chinese are apparently only now discovering the scope of indebtedness.  The wealth of all Chinese is based on real estate, the price bubble for Chinese real estate is a magnitude greater than the 2008 US real estate bubble (e.g. average home price in Shanghai is 25x the average salary, it peaked at 10x in New York...), and (4) how will the banks react, their actions are driven by the Chinese government too, with tightening restrictions on real estate lending. 

But as the wheels seem to be coming off in the real estate front, there is probably no easy solution here.  First, is that whatever the government chooses it will create pain in parts of the economy.  The slow and steady hand progress that has been deployed since January is probably no longer working, especially with foreign bondholders.  It is unclear what recourse the bondholders have, but somehow I suspect that they will not go quietly.  

Those who can seize assets are beginning to do so, others will have to absorb their losses.  It may be advantageous for the Chinese to completely disenfranchise the foreign bondholders, it worked for Argentina, so why not for China too. 

As the Chinese proverb says:  May you live in interesting times!


Comments

Post a Comment

Popular posts from this blog

The end of Tesla?

 it takes a special kind of idiot, to think that he can antagonize his entire customer base, and think that it will not impact his business. When Elon Musk went to work for Donald Trump, and created the doge department, he antagonized every liberal, and these people represent 90% of his client base.That’s not a brilliant move. Now Elon Musk is worth hundreds of billions of dollar, so he shouldn’t care a great deal, however, he needs to care because of several other issues. The cyber truck has been a disaster, most have had to be recalled because of defective glue, it’s not a truck, it’s not a car, it’s noisy, relatively uncomfortable, but great as a development platform. What Tesla has learned in making car manufacturing more seamless is truly amazing. The problem was that Elon Musk was so pissed with the Democrats, and with Joe Biden, in particular because of some slight, which were just plain stupid too. By the way, that he decided to support with hundreds of millions of dollar, ...
Post a Comment
Read more

Donald Trump‘s bad bargain

 The entire of 2023 and 2024 when Donald Trump was running for the White House, his mantra was no war, that the Ukraine conflict would be resolved in a day, and that he would do everything not to involve America and war. How the world has changed! He finds himself facing three conflicts; Ukraine, still going on almost 5 months after he became president. Gaza, an unspeakable crime against humanity, is obviously going to go all the way to its bitter end. And finally, Israel’s attack against Iran. It’s important to note, that Benjamin Netanyahu first indicated at the United nation that the Iranian were 3 to 5 years away from having the nuclear bomb. He made that statement in 1995. Therefore, no one is surprised that he uses the same two lines every so often. It’s entirely possible, that 30 years after he first announced it, that Iran has finally developed the bomb. It’s also remarkable that Iran, local power has been destroyed, from Yemen, to Syria, via Lebanon and Gaza to small exten...
Post a Comment
Read more

TACO again, but worst!

 Donald Trump got the rare earth metals that he had thrown away on April 2, liberation day as he called it. What did the Chinese get in exchange? The whole deal, is on the wrap right now. But let’s be clear. It’s the Chinese that have the upper hand.Some of the materials made by the Chinese, are simply unavailable anywhere else. suspicions are that the Chinese got the high-end chips that they lost under Biden. Tariffs will probably return to the level of April 1, and in the end Donald and his friends got nothing for it. It gets worse, Chinese exports to United States are down 40%. The Chinese have found new markets, I probably never gonna buy American grain again. Once again, Donald Trump proved he’s a great negotiator. He got absolutely nothing for his Showmanship. He told the world, that everyone would come and kiss his ass, instead they’re laughing At him. There’s no joke about Donald Trump, a 25 and inherited a huge fortune and proceeded to make it a small one. Bottom line, the...
Post a Comment
Read more