Chinese construction Mega-Bankruptcy. Evergrande about to crash for 355B

[teosanru]

https://www.bloomberg.com/news/articles/2021-09-17/china-boosts-cash-addition-to-soothe-nerves-amid-evergrande-saga

And here it happens again, a wierd use of fiat to save your ass for once, China decided to pump in $14 Billion into the economy to avoid any liquidity squeezes in the market, this was sort of expected as these type of crisis generally spiral down to all your market, adding liquidity would act like a patchwork on the balloon which was about to burst, let's see if China can settle this turmoil before it becomes a pain for it. If it would have been some other country government would have directly bailed them out until now.

[Joeyops]

Thats insane amount of money! How could so big firm with accountants, managers, CA's, lawyers working for them 24x7x365 can let this happen? I mean I am really startled with the fact that such big companies could go bankrupt even though they have peeps working all around. How did they not see this one coming in the first place?

From what I've read (my local news portal), the real estate business seems to have been in crisis for some time when it comes to China - because the data says that there are currently as many as 90 million vacant apartments or houses in China, which is enough for comparison to accommodate the entire population of Germany or France. In other words, companies like Evergrande were building a lot more than they needed to, and now while it sounds incredible, the Chinese are tearing down those same buildings.

In addition, Evergrande did business in something that had nothing to do with real estate management (private wealth management), which is just an indication that they were greedy far beyond their means. The expected scenario is that the healthy parts of the company will be sold, while the rest will have to be taken care of by Chinese banks.

Banks such as HSBC, UBS... and investment fund BlackRock have joined in buying Evergrande's debts. This is the scenario as expected. They will buy to help avoid collapse, and next the Chinese government will take over this massive corporate reshuffle.
They need to avoid the breakdown from happening because otherwise the consequences will be enormous.

What would be the possible outcome and if it fails, what would be the consequences ? The impact would be huge but comparable to anything  yet happened ?

[el kaka22]

I still do not understand what the big deal is about this company bankrupting. I mean the things they built is still there, its finances that they spent that is gone and they are bankrupting because of that, however what they have left to the world is still there. It means that owners and investors of this company will lose, but everyone else in the world wins with this.

I suspect that the amount is large which is cause for concern in the finance world but not like there are tens of companies bankrupting like this, it is just one company and that is rarely ever a problem. I believe that we should just let it be and eventually it will be a mute point.

[timerland]

Do you really think that China will let property prices slide?

I doubt it. Especially with the centralized controls that they have been pursuing for a while now, I think that they will be quite active in bailing out this particular sector.

The cash injections are already coming at full swing and likely will increase in size to make sure that all creditors are paid.

[oHnK]

https://www.bloomberg.com/news/articles/2021-09-17/china-boosts-cash-addition-to-soothe-nerves-amid-evergrande-saga

And here it happens again, a wierd use of fiat to save your ass for once, China decided to pump in $14 Billion into the economy to avoid any liquidity squeezes in the market, this was sort of expected as these type of crisis generally spiral down to all your market, adding liquidity would act like a patchwork on the balloon which was about to burst, let's see if China can settle this turmoil before it becomes a pain for it. If it would have been some other country government would have directly bailed them out until now.

It was highly expected that the government would interfere in the default case that occurred in Evergrande.  Even though the company has not completely gone bankrupt, this default condition will destabilize the country's financial system.  There are a lot of banks involved in this case.  In my country's experience, if there is one bank in a country with bad finances, this will attract many other banks.  Because banking conditions are the foundation of a country's financial system.  The amount of debt that has failed to be paid is very large, so the government will definitely intervene if it does not want a widespread impact on the country's economic stability.

[EdenHazard]

Do you really think that China will let property prices slide?

I doubt it. Especially with the centralized controls that they have been pursuing for a while now, I think that they will be quite active in bailing out this particular sector.

The cash injections are already coming at full swing and likely will increase in size to make sure that all creditors are paid.

The rumor has it.

The Chinese government may offer a bailout but that is still uncertain as the latest news we heard is that evergrande ask local government over the possible collapse.
Well we havent got a real accurate sources ... just the FUD around the crypto community which it has nothing to do except for the same investor putting money on crypto and on evergrande at once.

[stompix]

I still do not understand what the big deal is about this company bankrupting. I mean the things they built is still there, its finances that they spent that is gone and they are bankrupting because of that, however what they have left to the world is still there. It means that owners and investors of this company will lose, but everyone else in the world wins with this.

It ain't that simple.
The company was running basically on future promises at this point, everything that they were making was with debt money, and now they are unable to pay even for past debts so all the new projects they have been already given money for will not be able to be completed and there is nothing there, no property, no nothing.

Even if by miracle their assets will cover the debt this will not help people who depend on that money, imagine you have 1/3 of your revenue coming from a  company that goes bankrupt and you must wait in fear when the assets are liquidated to see if you manage to get your money back, but all this time you somehow have to stay afloat, especially with banks looking nervous at you when you're asking for another loan. There are hundreds of companies that depend on Evergrande, those whose only business or at least main income is based on them, then the direct employees 200k of them, and many many more.

You're basically extracting close to 2 million jobs from the economy, erase 300 billion and just because the sheet shows zero at the end you think everything is ok.
There is no winner in this situation, and there will never be one.

Anyhow:

The People’s Bank of China (PBOC) pumped 120 billion yuan ($18.6bn) into the banking system through reverse repurchase agreements, resulting in a net injection of 90 billion yuan ($13.9bn).

Seems like the PBOC decided to intervene, not directly but enough to calm the markets.

[teosanru]

https://www.bloomberg.com/news/articles/2021-09-17/china-boosts-cash-addition-to-soothe-nerves-amid-evergrande-saga

And here it happens again, a wierd use of fiat to save your ass for once, China decided to pump in $14 Billion into the economy to avoid any liquidity squeezes in the market, this was sort of expected as these type of crisis generally spiral down to all your market, adding liquidity would act like a patchwork on the balloon which was about to burst, let's see if China can settle this turmoil before it becomes a pain for it. If it would have been some other country government would have directly bailed them out until now.

It was highly expected that the government would interfere in the default case that occurred in Evergrande.  Even though the company has not completely gone bankrupt, this default condition will destabilize the country's financial system.  There are a lot of banks involved in this case.  In my country's experience, if there is one bank in a country with bad finances, this will attract many other banks.  Because banking conditions are the foundation of a country's financial system.  The amount of debt that has failed to be paid is very large, so the government will definitely intervene if it does not want a widespread impact on the country's economic stability.

The problem isn't inability of repayment, the problem is the inability of repaying at this point of time because the assets which the company holds aren't readily realizable and therefore Banks would have to classify the Company's debt as NPAs which would not only put Company into various sanctions but the Banks too will have to face consequences due to huge exposure in the company and obviously in such situations the retail investors would be paid at the last.

I still do not understand what the big deal is about this company bankrupting. I mean the things they built is still there, its finances that they spent that is gone and they are bankrupting because of that, however what they have left to the world is still there. It means that owners and investors of this company will lose, but everyone else in the world wins with this.

I suspect that the amount is large which is cause for concern in the finance world but not like there are tens of companies bankrupting like this, it is just one company and that is rarely ever a problem. I believe that we should just let it be and eventually it will be a mute point.

What you are saying is textbook stuff, In real-world economy is based on sentiments when a Publicly listed company this huge goes bankrupt, owners and investors see it as a barometer of the whole economy and feel that this could be just one of all the companies which are going to be bankrupt which leads to people and even institutions panic selling their positions leading to further erosion of wealth from the markets which lead to the unexpected closure of huge trading positions held by major trading firms and when all these are hit, they are unable to repay a debt to Banks which have huge exposures like 10-20% in these companies, so Banks are shaken and either need a bailout to sustain or an immediate capital infusion which becomes really difficult in these times because if the government does a bailout by printing more money, a crisis would be further aggrevated by Inflation. This creates a sort of Avalanche effect.

[Silberman]

Thats insane amount of money! How could so big firm with accountants, managers, CA's, lawyers working for them 24x7x365 can let this happen? I mean I am really startled with the fact that such big companies could go bankrupt even though they have peeps working all around. How did they not see this one coming in the first place?

Moreover if that company is such huge empire then what about the employees working for them? They could end up loosing their jobs i see!

There is no wonder though after you know how Kingfisher went bankrupt in the past putting SBI bank at high risk. There more banks who still given the loans to that company and today all of them got defaulted by the Vijay Mallya.

Terrific to see how these billionaires can be so stupid.

They are not really being stupid, what happens is that they know that they're going to be rescued and they are going to be given free money that they do not deserve, that is probably the best business that you can possibly make, create a company, lose a bunch of money and then be given a fortune so you do not go bankrupt, and even if that was not their intention this is what it is going to happen, and about how the company can get in such bad shape? It can be explained simply by the fact that companies are always trying to maximize their profits and as soon as something happens that doesn't go exactly as planned then they get in trouble.

[verita1]

The Evergrande bankruptcy case is something that makes us think that this type of investment is very risky. We who know how to invest in bitcoin and crypto prefer it precisely because of the transfer.
We will have to learn the causes of how this bankruptcy originated in order to learn when things are not going well.
It is sad because many families have been affected as well as other economic sectors.
When something bad happens in China, I say to myself: Oh! no, China again.

[STT]

The People’s Bank of China (PBOC) pumped 120 billion yuan ($18.6bn)

If they are weakening the yuan then its likely going to reverse gains made in the last year against the dollar which means we should expect a stronger dollar for the moment I guess.   Also a default or fear of loss can mean less speculative movement away from the dollar, generally that all makes the market more bearish and likely to retract some.   I think overall we recognize all paper money is gradually losing money every year and consistently for decades now but there are spikes in volatility also in that process and this is one of those times most likely.  The central banks to aid liquidity do not solve the problem, they just hope to snuff out any evidence of the failure.

[STT]

Andrew Left (Citron Research Founder)  was banned from trading in Hong Kong

Yep I saw that video recently also and to his credit he didnt come on and say told you so.   His take was well this market is not open to my particular aggressive opinion.
   The pivotal fact was he wasn't just stating an opinion back then but offering active short selling like Burry with housing debt in 2007, I presume he had investors coming to back his view.   China didnt like his stoking the fires to negative sentiment and views on this debt value, all China companies are essentially extensions of the state whether they realize or not they will find communism still exists in the majority.

In a capitalist market short selling is important and stops extreme failures, every short represents a future buy because they deliberately trade something they do not own.   In this case Evergrande shares (not debt) might be worth zero hence a very attractive short.   Most of it depends on government intervention, like USA in 2008 they can choose to prop it up directly or indirectly.

[zanezane]

Only a little time before we will see a housing bubble with the bankruptcy of Evergrande, and some analysts says that it's probably much bigger than the 2008 bubble. I mean with all the ghost apartments and abandoned sky high infrastructure, there's going to be one that's bound to happen.

[jaysabi]

China can, A. BRRR-print, and pump their economy with Yuan to stop the crash, OR B. Let the economy fix itself by leaving it alone, and let it be through a recession. For Bitcoin HODLers, we can, A. Relax, OR B. embrace another golden opportunity to buy the dip and HODL.

You can rest assured that ever if China is presented with two choices between letting something resolve itself or staging a huge power-grabbing intervention, they will take the latter every time.  The chinese party is obsessed with control, and they've turned their society into an Owellian nightmare that is only increasing the amount of control they exert over everyday life.

[DrBeer]

China can, A. BRRR-print, and pump their economy with Yuan to stop the crash, OR B. Let the economy fix itself by leaving it alone, and let it be through a recession. For Bitcoin HODLers, we can, A. Relax, OR B. embrace another golden opportunity to buy the dip and HODL.

You can rest assured that ever if China is presented with two choices between letting something resolve itself or staging a huge power-grabbing intervention, they will take the latter every time.  The chinese party is obsessed with control, and they've turned their society into an Owellian nightmare that is only increasing the amount of control they exert over everyday life.

The Chinese government, the latter, has always been totalitarian. The truth was showing signs of maturity and partial support for market rules. But totalitarianism does not tolerate freedom, which began to break through in everything and everywhere. Therefore, the most anticipated turn of events is "tightening the screws", a decrease in freedoms, an increase in totalitarian methods in management. Well, as a result - the curtailment of the economic "miracle"

[oHnK]

The Chinese government, the latter, has always been totalitarian. The truth was showing signs of maturity and partial support for market rules. But totalitarianism does not tolerate freedom, which began to break through in everything and everywhere. Therefore, the most anticipated turn of events is "tightening the screws", a decrease in freedoms, an increase in totalitarian methods in management. Well, as a result - the curtailment of the economic "miracle"

Honestly, in this case, I don't look at any relation between totalitarianism and the Evergrande problem. When this problem didn't handle by the government then this will cause the biggest multiplier effect for their country especially in the economic sector. If I compare, the scale of Evergrande's debt with my country's debt, the result is Evergrande's debt is bigger. So I conclude that this is not a simple problem that can be handle by Evergrande. When they default, this means they are in the trouble and have been the national issue. There are many banks affected by this case, but there is my curiosity which hasn't answer yet, Why did the government never warn the Evergrande about their debt? as we know their government is too authoritarian, so why this case never be touched by them?

[Sithara007]

The Chinese government, the latter, has always been totalitarian. The truth was showing signs of maturity and partial support for market rules. But totalitarianism does not tolerate freedom, which began to break through in everything and everywhere. Therefore, the most anticipated turn of events is "tightening the screws", a decrease in freedoms, an increase in totalitarian methods in management. Well, as a result - the curtailment of the economic "miracle"

A few decades back, China was under the iron curtain and the citizens were unware of the liberties being enjoyed by those in democratic nations. But along with economic prosperity, the communications with other countries also increased and as a result at least a section of the population started rebelling against the regime. Perhaps the events in Hong Kong (supported by the West) was the turning point. The regime realized that if they don't nip the rebellion in the bud, then it will end up in their own destruction.

[fillippone]

Other real estate Chinese operators are defaulting on a daily Basis.
Evergande is of course the bigger of them all, but surely not the only one:




Brace yourself, more are coming.

[PrimeNumber7]

It's nowhere as bad as Lehman Brothers. In 2008 Lehman had over $600 billion in debt.
13 years later this is $300 billion.

When Leghan failed, it held many assets that were traded on various exchanges. There were fears that Lehan would try to sell these assets at fire-sale prices in order to prevent bankruptcy, and these fears caused these asset prices to decline by a decent amount compared to what is normal for those types of assets. This meant that other banks that had no direct relationship nor exposure to Lehan was taking losses because they were holding similar assets (that had no realistic increased chance of defaulting). This had a cascading effect of banks being unwilling to lend to each other, or to anyone else.

Evergrande on the other hand holds assets that are not routinely traded on exchanges -- its assets are primarily made up of housing projects they are working on building, and shares in various business ventures. The companies that Evergrande holds equity stakes in will likely see depressed stock prices in the near term, however, this is not a huge deal for those companies because most companies do not rely on equity financing for day-to-day operations.

The damage that Evergrande can do to the Chinese economy is through the money it owes to its suppliers. Evergrande is a major customer of, and creditor to each of its suppliers, and Evergrande's ability to quickly pay its suppliers will affect its suppliers' ability to provide services to other companies that are building housing in China. This may lead to other builders incurring cost overruns and delays in completing their various projects.

Lehan was interconnected to the economies of the US and most European economies. Evergrande is really only connected to the Chinese economy (even though it does owe money to overseas creditors). I would say that Lehman's $600 bn in debt is about the same percentage of the economies it was connected to in 2007/8 as to the $300 bn in debt Evergrande has compared to the size of the Chinese economy.

China has been running hot for decades now, any normal country would know that the economic cycle of boom and bust is as natural as the sunrise and sunset. However the Chinese leadership refuse to accept the belt slackening and tightening of a well functioning capitalistic system - people borrow and spend too much, then credit tightens up and at least a mini recession has to happen. Unfortunately there is a weird concept of "losing face" or honor in their weird governmental system, a recession would show a sign of weakness and the CCP won't allow it. In such a governmental system it allows the rot to build up much worse as officials never want to be the one who takes the blame, so they cover it all up until the top leadership only hear about butterflies and roses. Due to the weird insular nature of the economy, it is unlikely that the true extent will be discovered until it is too late and possibly send the world into a shocking recession similar to 2008 subprime property crisis.

The CCP maintains tight control over information throughout China. If you look at why the markets crashed in March 2020, you would see this was largely caused by the panic caused by left-wing MSM (there is even a similar, although less strong argument regarding why the housing bubble popped in 2007/8). The CCP will not allow this kind of media-induced panic and will instruct banks that are effectively run by the state to continue lending to companies that probably should not be lent to by objective underwriting standards. This undeserved credit allows companies to avoid failure and to eventually be absorbed by other state-run businesses.

The above has resulted in the absence of bust periods but also means that many business failures are not widely known, and business leaders who took actions that would have lead to failures in the West have been allowed to remain in leadership positions in China. The situation with Evergrande is too big for the CCP to cover up as they have with other business failures. The CCP has made it clear that western creditors will be the first to see losses, although I believe that Chinese investors will see massive losses, which will lead to a major contradiction in the Chinese economy, hopefully enough for the CCP to lose legitimacy and/or power.

I am reading today that Evergrande could seriously affect crypto markets because there are some connections with stablecoins like USDT Tether and USDC that have exposure to commercial papers,
even if they are not directly from Evergrande this could affect global markets of commercial papers.
Tether is holding billions of dollars in commercial papers and they are probably in top 10 holders for that, and USDC issuer Circle have 9% of assets in commercial papers.
This is much more serious than people think and shares of other Chinese property developers and banks continue falling.

Nearly every major company in the world issues commercial paper. Evergrande's failure is not going to affect every company in China, and will not affect the majority of companies in Asia outside of China. It will probably not affect more than a handful of companies outside of Asia.

There has been speculation that tether holds commercial paper in Chinese companies. There was an article that went into great detail about many things about tether that was published ~a week ago, that briefly mentioned that tether holds commercial paper in Chinese companies. No details were provided.

If Evergrande does fail, and the market believes that Tether has serious exposure (regardless of the truth to this), I would expect the price of bitcoin to initially spike as people sell tethers for bitcoin, but will over the medium term decline as people try to redeem tethers in mass. This topic alone is probably deserving of its own thread.

[DrBeer]

It's nowhere as bad as Lehman Brothers. In 2008 Lehman had over $600 billion in debt.
13 years later this is $300 billion.

.....

Everything is well and almost fully described, thanks! But there is another nuance. Deep penetration into the economics of the construction business and related! I, being in China, about 10 years ago, was surprised how much they build. This was explained to me by some kind of "agreement" or an internal project, when the state creates comfortable conditions for such a business, banks lend almost without restrictions, all this gave a strong impetus to the development and growth of related businesses - the production of building materials (concrete, brick, fittings, cable products , building mixtures and cement, etc.), and these are thousands of enterprises, millions of jobs, market development ...
They also said, but I cannot confirm that it is true that residential construction in China on such comfortable conditions was "allowed" if more than 95% of Chinese resources are used during the construction of the facility.
As a result, housing construction has become a mega-profitable and large-scale project in China. Now imagine what will happen if this one of the "prime movers of the economy" stops? Thousands of enterprises, due to lack of demand, and then financing from banks, will stop their production. Together with them - construction artels, where builders, plasterers, loaders, electricians, crane operators, ... The next link - tens of millions of unemployed. The next link is an increase in the load on local budgets for the maintenance of these tens of millions (and maybe much more), unemployed. Non-repayable loans, a drop in quotations ... Therefore, it is too early to talk about the consequences, not all processes have appeared yet ...