The Evergrande Crisis Explained for HKEX:3333 by Michael_Wang_Official
Disclaimer: This is not investment advice. This is for educational and entertainment purposes only. I am not responsible for the profits or losses generated from your investments. Trade and invest at your own risk.
What is Evergrande?
– Evergrande is China’s second largest real estate developer, founded in 1996.
To understand the size of this company, here are some numbers:
– Evergrande is operating more than 1300 projects in more than 280 cities.
– They had success with real estate, so they also expanded horizontally, acquiring a tram company as well as Guangzhou FC
– They own a lot of other smaller companies, but their main focus and business is in real estate.
The problem with Evergrande
– Evergrande’s main problem is its liabilities.
– The only thing you need to understand is that the company is heavily in debt – $310 billion to be specific.
– The company is also going through difficult times with insolvency problems, and underperforming revenue.
– When the Chinese government released a list of companies that could pose a threat to the market and lead to a collapse, Evergrande was also on the list.
– It was also recently revealed that they have also begged the government for help in their backdoor listing scheme.
Evergrande’s stock and bond prices
Overall, Evergrande’s stock is down nearly 90% from its all-time high and more than 80% since the start of the year.
– The company’s dollar bond price has also dropped more than 70%.
– What’s also worrisome is that Evergrande’s real estate partners’ bonds are also plummeting, signaling a potential collapse.
Of Evergrande’s $310 billion in debt, about $85 billion came from bonds and loans from banks.
– These are debts on which Evergrande actually pays interest.
– $67 billion coming from the shadow banking system; money from shady sources.
– The rest of the $158 billion is really the most important part. This is the amount of accounts payable.
– When Evergrande is in business and they are developing real estate, they need to purchase the necessary materials and resources.
– But when they buy whatever they need from the supplier, they don’t pay in cash.
– It all comes down to accounts payable, which basically means they owe their suppliers money.
Anatomy of a market crash
– Financial institutions and suppliers rely heavily on Evergrande, and many companies could go bankrupt if they don’t get paid.
– This is essentially the domino effect of the entire Chinese market, with Evergrande at its center.
– Not only that, we also need to think about Evergrande employees.
– The company alone has more than 123,000 employees and does not include the number of construction workers hired for each of their projects.
China’s real estate market situation
– China’s real estate market is the largest in the world
The market also accounts for 10% of the entire Chinese economy.
Taking this into account, a complete collapse would have devastating effects not only on the Chinese economy, but also on its stability. CCP and the global economy.
Why is the Chinese government able to solve it?
– If we look at the numbers, it can also be said that they can get a government bailout.
– While their liabilities are up to $310 billion, the interest they really need to pay is imminent, up to $669 million
– This is also a large sum, but much easier to manage than $310 billion.
– So while Evergrande is struggling because of insolvency, if the government helps a little, they might be able to get back on their feet.
– And with investors congregating in front of the Evergrande and the growing probabilities of political risk, $669 million could be a small sacrifice for regime stability.
China’s Indirect Intervention
– Global Times, a media that directly reflects the stance, stance and views of the Chinese government, thinks that Evergrande is “not too big to fail”.
– But, of China central bank injected $14 billion in cash on September 17 and another $15 billion today through Open Market Operations (OMO).
– And since the liquidity they offer is the most they’ve done in the last 8 months, it’s safe to say they’ve been thinking of Evergrande
Expert opinion on the matter
– Michael Burry, founder of Scion Capital LLC, shared a tweet by @INArteCarloDoss who raised several important points.
– 3 red lines, which are debt-related restrictions, started last year.
– China has lifted the property market by using a lot of debt, and the government wants to write off the debt.
– It is almost certain that Evergrande’s bankruptcy is a matter of time, but the question is how severely other companies and financial institutions will be affected.
– Of course the Chinese government will provide liquidity in the market, but will not directly intervene and solve the problem for Evergrande.
– In general, it can be said that Michael Burry agrees with this theme by saying that Evergrande’s bankruptcy is inevitable, and that the Chinese government will intervene indirectly, if it decides to intervene.
– So a crisis of some kind is bound to happen, it’s a matter of how much it plays out.
– On the other hand, we have @BaldingsWorld
– Christopher Balding is a professor at Peking University
– His logic is that we won’t see a financial crisis because we are applying the logic of the free market to the market of a country that is actually completely under the control of that country’s government.
– So this professor believes a bailout for Evergrande is inevitable.
How to prepare for a potential crash
– Since nothing is certain yet, the best we can do as investors is to keep an eye and see how the Chinese government can directly or indirectly solve the problem.
– Depending on how bad the situation gets, increasing one’s cash holdings may be prudent in the event the US stock market takes a hit as well.
– This is especially important because S&P500 indicator is currently testing 60 Simple Moving Average ( SMA ) on daily basis. (chart below)
Evergrande’s debt situation could have bigger impacts than we anticipated. Regardless of whether the Chinese government intervenes, and directly or indirectly, there will be repercussions on the Chinese economy. Therefore, it is important to keep an eye on how the situation may play out and affect the US stock market.
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