Skip to main content

Evergrande liquidation rulling

Now, that's big news, the Hong Kong courts ordered the winding up of Evergrande.  It makes the actions of Peter's Chinese client who sold all 18 of their properties look incredibly wise.  I write this as we are flying back to the UK.  Peter's client was funny because he was saying that the possible rent for his properties was less than 1% of the value of the real estate.  Which explains why no one rents out apartments.  There's no money there!

It is important to remember that the support for housing was driven by two goals, creating jobs and a domestic outlet for China's private savings.  It gets worse, #2, #3, #4 largest development companies are state-owned enterprises.  Their liabilities are guaranteed by the state.  

The Hong Kong court decision could play out in three different ways:

(1) The Chinese government allows the application of Hong Kong law and Evergrande is liquidated following standard market bankruptcy rules: Likelihood 0.0001%

(2) The Chinese government declares the Hong Kong court ruling as non-binding on China (remember one county two systems), and formally rejects the Hong Kong court's demand.  Likelihood 10%

(3) The Chinese government ignores the Hong Kong courts and thereby stymies the liquidation:  Likelihood 89.9999%

The first two are unlikely because Evergrande's problems are not specific to the company, they are endemic to the sector.  What matters is there is a massive oversupply of housing in China.  It has been evident for years.  

Finally, the third is the most obvious because it fits with the Chinese government's behaviour of the past few years: Shovel forward and make it a problem for another day.  Option #3 is the best for China's bureaucracy, they don't even have to collude, because the impact on China's economy of Evergrande's bankruptcy is so obvious.  They don't have to consult anyone, they just need to say no, or simply ignore the problem, and through bureaucratic morass stimy the liquidators' efforts.

To give a sense of size comparison, the US housing and loan crisis was caused by a 3% to 5% excess supply in the US housing sector.  In China, the excess supply is estimated at between 100% and 300% of the total supply.  It gets worse, demographics in China are not conducive to household formation, and state and local depend for their survival on the sale of land as their sole source of revenue.  The number is so massive, that the Chinese government itself has estimated that there is sufficient excess housing to lodge between 1.5 and 3 billion Chinese.

So demand for housing in China is probably much lower than estimates and already massively overleveraged state and local governments not only will not be able to service their debts but will be unable to meet their salary obligations.

The consequence of Evergrande's bankruptcy is far-reaching because for multinational companies (and their insurers) it will clarify their rights to enforce Hong Kong contracts in mainland China.  As they say, "Could the last one out turn off the lights!"





Comments

Post a Comment

Popular posts from this blog

Spray painting Taylor Swift G650 aircraft (updated)

 First, a bit of paint will not harm anyone.  These climate activities are going to learn two things in the next few days:  (1) Trespassing at an airport is a felony almost anywhere in the world.  That means criminal prosecution.   (2) removing paint from an aircraft is expensive.   So these climate activists are about to find out the reach of the British criminal system and it will not be pleasant, the UK has very strict laws about that, I would be surprised if cleaning the aircraft of all the paint will cost less than $100,000.     I am sure that when they planned (premeditation) this little show they had a very valid logic to doing this.  Tonight, they are probably realizing the depth of their troubles.   I understand that in the UK it's a minimum one-year jail sentence.    Also, good luck travelling with a criminal trespass charge against you.  I am relatively certain that the airline industry will ...
Post a Comment
Read more

Farm; Half year performance

 People appear to be genuinely curious. 2024 has been a record first half for the farm.  The addition of high tunnels has greatly impacted our revenues.   While we expected Q1 profits to be higher, it really was the second quarter that produced the goods.  The terrible weather has greatly impacted the production of high-end vegetables. Energy costs are now very stable and have become a fixed variable especially now that our bio digesters are fully dialled in.   Replacing some of our pre-dryer equipment was covered under warranty, and the new equipment is far better at dealing with gas moisture, and much better steel!   Our diesel costs are what they are! Our biologist and ecologist devised a new planting plan for our high tunnels that greatly reduced pests, especially slugs.   We have seen a 90% decline in sluggs this year, resulting in better yields.   It seems that several plants act as natural repelants and if planted c...
Post a Comment
Read more

Britain, France and Egypt

 The voters realize now that the Conservative Praty desire to return to 19th-century dominance has driven its hatred of the EU.  The voters realize now that departure from the EU has accelerated Britain's decline and may soon make it irrelevant.  At best it will have to kiss American arses to maintain its standing.  For this, the conservatives were punished.  The decline of Britain was inevitable, competition from Frankfurt and Germany in Finance was bound to grow.  The core of Europe (aka Germany) is aging quickly Macron seems to be winning his bet, the left alliance that won the legislative elections will not remain united for long, since they disagree on about everything.   The Far right though it was about to assume power is once again relegated to the back of the bus.   It may draw its own conclusions, but not all of these are good for France.  The far-right has won nearly 1/3rd of the electorate, that is not something to be ig...
Post a Comment
Read more