While Evergrande is getting most of the press, dozens likely hundreds of Real-estate related firms will default especially in 2022. A crisis in mounting in China’s bizarre shadow banking real-estate mechanism with the three red line rule (see bottom of article for explanation). Even as China regulates its technology “fictive” economy, manufacturing and real-estate aren’t impervious.
The troubled Chinese property group Evergrande has edged closer to a government-engineered restructuring which could see bondholders take huge losses as Beijing’s price for saving millions of homeowners from financial ruin. It could trigger not only a default but a housing bubble crash. China put too much emphasis on urban development with real-estate as the only means for consumers to invest, which was a terrible idea.
Police descended on Evergrande’s Shenzhen headquarters late Monday after dozens of people gathered to demand repayments on overdue wealth management products. Protesters numbered in the hundreds on Sunday, Caixin reported. The real-estate bubble crashing could signal real unrest in China, as the economic system is tied to real-estate in very unscrupulous greed-is-the-idol manners.
Chinese consumers have no idea the risks they are under. Unconfirmed videos of protests against the developer in other parts of China were being shared widely on Weibo, the country’s popular microblogging platform. Even the default of Evergrande alone is significant.
With the likelihood increasing every day that the massively indebted group will be dismantled to avoid triggering a market-wide panic, trade in one of its bonds was suspended in Shanghai on Monday after it plunged 25%. This is what happens before a crash, and the signs of been there for weeks and months now for anyone to see. It’s not just Evergrande, this video highlights some key points:
In a statement late Monday, Evergrande said rumors that it will go bankrupt are not true. But this is a hot potato of the worst kind for China’s inflated real-estate scene. The economy is too tethered to this scam and it’s gotten to be very unhealthy for shadow banking’s risks and China’s huge debt crisis that’s coming so fast it’s nearly inevitable now.
Small-scale protests over troubled investment products aren’t unheard of in China, but they’re rare enough to attract attention from authorities who put a premium on social stability and have little tolerance for unsanctioned gatherings. As more real-estate firms approach default, this will only continue. In 2022 is the real danger.
The sharp reversal in shares of Evergrande and its units means Hui’s friends are now facing potentially punishing losses. The developer’s shares have tumbled about 70% this year, while Evergrande Property Services Group Ltd. is 34% below its initial public offering price. A lot of this real-estate mechanics results on ponzi-schemes which regulators will have to stop since too much greed ruins China’s chances for common prosperity in an era of aging populations and a plummeting fertility crisis.
China’s one-child policy, overly expensive tier 1 cities and a real-estate bubble all but dooms the prospects of young people in China today and in the 2020s and 2030s. Whether they prompt Xi Jinping’s government to change tack on Evergrande remains to be seen. China’s top financial regulator signed off on the developer’s plan to renegotiate payment deadlines with banks and other creditors in August, a person familiar with the matter said last week.
Concern the company will need to sell assets at a steep discount is fueling declines in its listed subsidiaries. The world’s most indebted developer has total liabilities of $300 billion. China’s real-estate scene is a multi $Trillion dollar situation that could create a massive debt crisis and mob instability.
Putting all your eggs in one basket? That’s exactly what China’s emphasis on real-estate has forced generations of Chinese citizens to do and it’s very risky.
With police descending on Evergrande’s Shenzhen headquarters late Monday after dozens of people gathered to demand repayments on overdue wealth management products this could easily spiral out of control. Protesters numbered in the hundreds on Sunday, Caixin reported. The Chinese State needs to deal with its real-estate bubble with extreme care.
Evergrande told employees at its office in Shenyang, near the border with North Korea, to work from home after staffers who bought the company’s WMPs staged a protest over the weekend, a person familiar with the matter said. In Guangzhou, angry homebuyers surrounded a local housing bureau last week to demand Evergrande restart stalled construction.
Unconfirmed videos of protests against the developer in other parts of China were being shared widely on Weibo, the country’s popular microblogging platform. There’s no indication that any of them have turned violent.
In a statement late Monday, Evergrande said rumors that it will go bankrupt are not true. While the developer is facing unprecedented difficulties, it is firmly fulfilling its responsibilities and is doing everything possible to restore normal operations and protect the legitimate rights and interests of customers, according to the statement on its website. The company didn’t comment on the protests.
The latest uproar allows Evergrande’s proposal late last week to impose lengthy repayment delays on holders of WMPs, the lightly regulated investment vehicles that have become a key source of funding for the developer. While Evergrande tweaked its plan on Monday in an attempt to mitigate the backlash, retail and institutional investors will still face delays unless they accept repayment in the form of Evergrande-developed properties.
Small-scale protests over troubled investment products aren’t unheard of in China, but they’re rare enough to attract attention from authorities who put a premium on social stability and have little tolerance for unsanctioned gatherings.
Whether they prompt Xi Jinping’s government to change tack on Evergrande remains to be seen. China’s top financial regulator signed off on the developer’s plan to renegotiate payment deadlines with banks and other creditors in August, a person familiar with the matter said last week. It’s unclear if officials had given explicit guidance on WMPs.
With more than $300 billion in liabilities, the developer has become one of the most systemically important companies in China. On top of its obligations to WMP investors and bondholders, it owes about $147 billion in trade and other payables to suppliers and received down payments on yet-to-be-completed properties from more than 1.5 million home buyers as of December. How can it NOT default? The State would have to take it over and somehow swallow the cost, it would be barely worth it.
Evergrande’s bonds are pricing in a near-certain likelihood of default, with its dollar note due 2022 falling by about 2 cents to 31 cents on Monday. Evergrande said in August it was forced to suspend work on some projects due to overdue payables.
The company’s billionaire founder, Hui Ka Yan, pledged to complete projects this month, issuing what he called a “military order” to ensure property construction and delivery. However China’s fake Billionaires are being toppled by the Government with regulation on purpose.
The real-estate and technology firms certainly do belong to a kind of fictive economy in China, who see things like manufacturing over service jobs as more real. With rampant corruption and ponzi-scheme style business models in both real-estate and the tech sector, China’s regulators have their work cut out for them in the 2020s.
Evergrande doesn’t disclose details of its WMP issuance, making it difficult to gauge the size of its outstanding products. It’s hard to trust these companies with Billionaires at the top while most of the biggest real-estate families are all from China. It’s not a system that’s compatible with China’s reforms in common prosperity. If Ant Group has to be dismantled, a lot of real-estate firms will default with the three red lines rule. It’s just math.
The three red lines
- Liability-to-asset ratio (excluding advance receipts) of less than 70%
- Net gearing ratio of less than 100%
- Cash-to-short-term debt ratio of more than 1x
How many real-estate firms will default in 2022? It will be hundreds. What’s more fictive, a thriving service digital platform sector or an inflated real-estate bubble of development that’s not even sustainable? The best thinkers in the Chinese State have some work to do.
Just as China is over-expending into the EV sector, too much growth too fast never ends well. You can stamp out religions and conduct wolf warrior diplomacy, but how do you regulate the idol that Greed is God? China actually needs to implement rule of law if it wants social order.