China’s Lehman Brother’s Moment is Evergrande Defaulting

  • The real-estate industry in China represents anywhere from 15-30% of China’s GDP.
  • Evergrande owes around $300 Billion dollars
  • China’s property bubble bursting will be the total opposite of “common prosperity”.
  • Evergrande’s collapse could plummet trust in the Chinese Communist Party.

China’s glorious illusion of stability could be seriously challenged in October, 2021. Starting on September, 21st, 2021.

China’s Zero-Covid policy, a mounting graduate unemployment rate crisis and a real-estate chain reaction could threaten China’s growth prospects in 2022.

Evergrande’s collapse is 30% likely to lead to a fire sales pummel of an already shaky real estate market, squeezing other developers and rippling through a supply chain that accounts for more than a quarter of Chinese economic output. The systemic risks are mounting for China’s precarious shadow-banking debt leveraged economy.

China’s greed and corruption problem became too serious as economic growth and real-estate property growth grew too fast in the 2010 to 2020 period.

So how could this be China’s Lehman Brother’s moment? It’s not hard to see: Covid-weary consumers retrench even further, and the risk of popular discontent rises during a politically sensitive transition period for President Xi Jinping. Credit-market stress spreads from lower-rated property companies to stronger peers and banks.

Evergrande is a symbol of how local governments, banks, the CCP and Billionaire families were practically running a ponzi-scheme in the real-estate markets for years. This is not how you regulate a growing economy, it’s too vulnerable to disruption.

While it’s impossible to know for sure what would happen if Beijing allows Evergrande’s downward spiral to continue unabated. Confidence in China’s equity markets are plummeting and this of course includes the real-estate market.

Evergrande bankruptcy would cause problems for the entire property sector and many others will follow, as simply too much debt is due in 2022. It’s a Black Swan scenario for global GPD and one of the biggest challenges China will face in the next five years.

Chinese authorities have begun laying the groundwork for a possible debt restructuring, assembling accounting and legal experts to examine Evergrande’s finances, while telling major lenders not to expect interest payments due next week on bank loans. It will be nearly impossible to prevent contagious as it has likely already begun.

China Huarong Asset Management Co. — has been suspended. Global investors who bought $527 billion of Chinese stocks and bonds in the 15 months through June begin to sell. The carnage could even cost China’s top dog his job if massive instability and riots follow. That’s about a 10% risk of that, for China that’s a pretty high risk.

However China’s shadow banks subservient to the Government will likely come to the rescue. Rather than allow a chaotic collapse into bankruptcy, analysts predict regulators will engineer a restructuring of Evergrande’s $300 billion pile of liabilities that keeps systemic risk to a minimum.

In a shadow banked economy, even overt manipulation doesn’t always do the job history notes. Beijing’s bungled stock-market rescue in 2015 showed how difficult it can be for policy makers to control financial outcomes, even in a system where the government runs most of the banks and can exert outsized pressure on creditors, suppliers and other counterparties.

So to summarize I am fascinated by this because it will show how resilient China’s economy really is. China Evergrande Group is deeply in the red – to the tune of $300bn. And concerns are mounting that if it defaults on its debt, it could spell disaster for China’s property market and send shock waves through the world’s second-biggest economy.

China’s proper bubble bursting could even lead to a market crash in the U.S., that could be the catalyst in October, 2021.

Contagion risk was on full display Thursday. Chinese junk-bond yields jumped to an 18-month high and shares of real estate companies plunged after Evergrande had its credit rating downgraded and requested a trading halt in its onshore bonds. Too much liquidity squeezed could lead to a crisis.

Evergrande is currently the world’s most indebted real estate developer. While it gets the press, there are hundreds of other such firms at risk, due to too much debt against China’s four red line policy. Even if Evergrande escapes the worst fate, 2022 will be a messy year for China’s real-estate sector, and hence it’s a do not touch zone for potential investors. It’s not just risky, it’s doom and gloomy.

While the U.S. has a 10% correction every 1.5 years, China’s equity market is much more volatile. Evergrande’s main banks were told by China’s housing ministry this week that the developer won’t be able to make interest payments due Sept. 20, according to people familiar with the matter. So the real show begins on September, 21st, 2021 – traditionally a two week period when major global dips occur in equities.

The firm is scheduled to make interest payments due Sept. 23 of $83.5 million for a dollar note and 232 million yuan ($36 million) for a local note, Bloomberg-compiled data show. Evergrande’s founder has net worth at $11.4bn, making him the 53rd richest person on its Billionaires 2021 list and the 10th wealthiest on its China Rich List 2020. Those Billionaire real-estate moguls of China aren’t doing its stability any favors. They will have to be dealt with.

To give you a modest idea of the scale of Evergrande’s real-estate domain, Evergrande Property Services, has approximately 2,800 projects in 310 cities in China encompassing a total contract area of more than 680 million square metres, according to the firm’s website. It’s the 2nd biggest in China.

Evergrande’s inability to make timely payments on the interest and principal amounts of its loans has investors inside and outside of China worried and Covid-19 has complicated the future of how debt is managed in major economies. Many house markets are in a bubble inside a bubble, and that’s won’t end with inflation this high and record low interest rates.

  • Evergrande’s shares have fallen a whopping 81 percent since the beginning of the year, and its dollar bonds have fallen towards record lows.
  • Moody’s Investors Service downgraded Evergrande and its subsidiaries on September 7, citing a negative outlook.
  • Default or rescue seems now inevitable. Greed has a karma of its own making.

In China greed without rule of law is a major problem. China though has to protect its internal image of stability for the CCP. China’s government isn’t averse to taking over companies from the private sector if needed. It seized Baoshang Bank Co. in 2019 and assumed control of HNA Group Co., the once-sprawling conglomerate, in early 2020 after the coronavirus pandemic decimated the company’s main travel business.

Better than that risk contagious and unrest, isn’t it? Better an orderly restructuring. The Evergrande endgame may depend largely on how Xi decides to balance his goals of maintaining social and financial stability against his multi-year campaign to reduce moral hazard.

However the situation could easily become unmanageable and is the best chance for a coup in China in the last ten years. Unthinkable right? Anything is possible. 2008 didn’t prevent greed from creating a winner-takes-all capitalism in the West, is China really any different?

Evergrande shares fell as much as 10% Thursday to their lowest since October 2011 amid sharp declines in China’s property sector.

How fast the Billionaires can be toppled in China, how just is common prosperity. This ain’t no Boomer capitalism in New China. So you really want to be a real-estate Tycoon?

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