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

Ok so I lied...a little (revised)

When we began looking at farming in 2013/14 as something we both wanted to do as a "second career" we invested time and money to understand what sector of farming was profitable.  A few things emerged, First, high-quality, source-proven, organic farm products consistently have much higher profit margins.  Secondly, transformation accounted for nearly 80% of total profits, and production and distribution accounted for 20% of profits: Farmers and retailers have low profit margins and the middle bits make all the money. A profitable farm operation needs to be involved in the transformation of its produce.  The low-hanging fruits: cheese and butter.  Milk, generates a profit margin of 5% to 8%, depending on milk quality.  Transformed into cheese and butter, and the profit margin rises to 40% (Taking into account all costs).  Second:  20% of a steer carcass is ground beef quality.  The price is low, because (a) a high percentage of the carcass, and (b) ground beef requires process
Post a Comment
Read more

21st century milk parlour

When we first looked at building our farm in 2018, we made a few money-saving decisions, the most important is that we purchased our milk herd from a retiring farmer and we also purchased his milking parlour equipment.  It was the right decision at the time.  The equipment dates from around 2004/05 and was perfectly serviceable, our installers replaced some tubing but otherwise, the milking parlour was in good shape.  It is a mature technology. Now, we are building a brand new milk parlour because our milking cows are moving from the old farm to the new farm.  So we are looking at brand new equipment this time because, after 20 years of daily service, the old cattle parlour's systems need to be replaced.  Fear not it will not be destroyed instead good chunks will end up on Facebook's marketplace and be sold to other farmers for spare parts or expansion of their current systems. All our cattle are chipped, nothing unusual there, we have sensors throughout the farm, and our milki
Post a Comment
Read more

So we sold surplus electricity one time last summer...(Update)

I guess that we will be buying an additional tank for our methane after all.   Over the past few months, we've had several electricity utilities/distributors which operate in our region come to the farm to "inspect our power plant facilities, to ensure they conform to their requirements".  This is entirely my fault.  Last summer we were accumulating too much methane for our tankage capacity, and so instead of selling the excess gas, that would have cost us some money, we (and I mean me) decided to produce excess electricity and sell it to the grid.  Because of all the rules and regulations, we had to specify our overall capacity and timing for the sale of electricity (our capacity is almost 200 Kw) which is a lot but more importantly, it's available 24/7, because it's gas powered.  It should be noted that the two generators are large because we burn methane and smaller generators are difficult to adapt to burn unconventional gas, plus they are advanced and can &qu
Post a Comment
Read more