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 by 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 figures:
– Evergrande manages more than 1,300 projects in more than 280 cities.
– They had success with real estate, so they also developed horizontally, acquiring an electric vehicle business as well as Guangzhou FC
– They own a lot of other small businesses, but their main focus and main activity is in real estate.
The problem with Evergrande
– The main problem with Evergrande is its liabilities.
– The only thing you need to understand is that the company is heavily in debt – specifically, $ 310 billion.
– The company is also going through difficult times with insolvency problems and underperformance in terms of turnover.
– When the Chinese government put together a list of companies that could pose a threat to the market and lead to its collapse, Evergrande was also on the list
– It was also recently revealed that they also begged the government to help them with their backdoor listing plan.
Evergrande stock and bond prices
– Overall, Evergrande stock has fallen almost 90% from all-time highs, and more than 80% since the start of this year
– The price of the company’s dollar bond has also fallen by more than 70%.
– What is also worrying is the sharp drop in the bonds of Evergrande’s real estate counterparts, which signals a potential crash.
– Of Evergrande’s $ 310 billion debt, roughly $ 85 billion comes from bonds and bank loans.
– These are the liabilities for which Evergrande actually pays interest.
– $ 67 billion comes from parallel banking systems; money from questionable sources.
– The rest of the $ 158 billion is actually the most important part. This is the amount of accounts payable.
– When Evergrande does business and develops real estate, it must purchase the necessary materials and resources.
– But when they bought what they needed from their suppliers, they didn’t pay in cash.
– Everything was counted as accounts payable, which basically means they owe the vendors money.
The anatomy of a stock market crash
– Financial institutions and suppliers depend heavily on Evergrande, and many companies could go bankrupt if they are not paid.
– This is essentially a domino effect of the entire Chinese market, with Evergrande at the center of it.
– Not only that, we also have to think about the employees of Evergrande.
– The company alone has over 123,000 employees, and that does not include the number of construction workers who are hired for each of their projects.
Chinese real estate market situation
– The Chinese real estate market is the largest in the world
– The market also represents 10% of the entire Chinese economy.
– Given this, a complete collapse would have devastating repercussions not only on the Chinese economy, but also on the stability of the PCC , as well as the global economy.
Why the Chinese government is able to bail out Evergrande
– If we look at the numbers, we could also say that they could get a government bailout.
– While their liability stands at $ 310 billion, the interest they really owe imminently comes to $ 669 million
– It’s still a lot of money, but a lot more manageable than $ 310 billion.
– So while Evergrande struggles with insolvency, if the government helped a bit, they might be able to get back on their feet.
– And with investors rallying outside the Evergrande building and the likelihood of political risk mounting, $ 669 million could be a small sacrifice for regime stability.
China’s indirect intervention
– The Global Times, a media outlet which directly reflects the position, position and opinion of the Chinese government, said that Evergrande was “not too big to fail.”
– But, Chinainjected $ 14 billion in cash on September 17 and an additional $ 15 billion today through Open Market Operations (OMO).
– And since the liquidity they provided was the greatest they’ve made in the last 8 months, it’s safe to say that they had Evergrande in mind
Expert opinion on the matter
– Michael Burry, Founder of Scion Capital LLC, shared a tweet from @INArteCarloDoss, which sets out some important points.
– The 3 red lines, which are debt restrictions, started last year.
– China has lifted the real estate market by getting into a lot of debt, and the government wants to get out of debt.
– It is almost certain that Evergrande’s bankruptcy is only a matter of time, but the question is how much other companies and financial institutions will be affected.
– Of course, the Chinese government will provide liquidity in the market, but will not directly intervene to solve the Evergrande problem.
– Overall, you could say that Michael Burry agrees with this thread that says that Evergrande bankruptcy is inevitable, and that the Chinese government will intervene indirectly, if it decides to intervene.
– So a crisis in one form or another will certainly take place, it is a question of the degree to which it takes place.
– On the other hand, we have @BaldingsWorld
– Christopher Balding is professor at Peking University
– Its logic is that we will not see a financial crisis because we apply the logic of the free market to the market of a country which is in fact completely under the control of its government.
– So this professor thinks that a bailout of Evergrande is inevitable.
How to prepare for a potential crash
– Since nothing is set in stone yet, the best we can do as investors is to keep our eyes open and see how the Chinese government might directly or indirectly solve the problem.
– Depending on the development of the situation, it may be prudent to increase its liquidity in case the US stock market is also affected.
– This is all the more important as the S & P500 index is currently testing 60 ( ) daily. (table below)
Evergrande’s debt situation could have bigger implications than we can anticipate. Whether the Chinese government intervenes or not, and whether it is indirectly or directly, there will be repercussions on the Chinese economy. As such, it is important to keep an eye on how the situation may develop and affect the US stock market as well.
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