Evergrande - How $300B Turned To Dust

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2 years ago
Evergrande Building - Wikimedia

Evergrande is a Chinese private conglomerate that started as a real-estate and constructions business. It is now facing a debt crisis having 300 billion USD of liabilities unable to compensate. Evergrande’s expansion was funded by borrowing and by presales of apartments in buildings that were yet to be constructed.

Evegrande was founded in 1996. It is a Chinese real estate behemoth but also expanded its scope beyond that, into financial services, electric vehicles production, internet infrastructure, operation of hotels and health businesses, and various other sectors.

The firm says it has 200,000 employees, but indirectly creates more than 3.8 million jobs every year, according to its website.

-CNBC

The stock price of Evergrande has crashed by 90% since its heights last year and looks like it is heading to zero. There had been thoughts about the Chinese government intervening and nationalizing the private company, but it seems that since no action has been taken yet, the most probable course of action will be a "controlled detonation".

Stock Price has Collapsed - Heading to Zero

Evergrande is already creating waves in the already weakened by Covid financial world, because of the size of the debt that will be erased. We observed this negative market sentiment in the futures markets in the US and the European Stock markets at opening today. It was a major headline in financial news in the previous days that also added to the negativity because of the increased US debt.

Source: Yahoo Finance

Its stock (EGRNF) has crashed, 90% down since the top from last year and the company can be considered already in default on its debt.

As we can see the market cap of the company is currently evaluated at $5.28 Billion, which is not even 2% of the debt this company has amassed. It has been left with zero liquidity and has no chance of restructuring its debt.

What it will be with Evergrande is a collapse of historic proportions and debt of $300 Billion that will have to be written-off. This creates additional long-term issues for the financial institutions that lent and invested in Evergrande.

This Bloomberg chart explains the wipeout of 90% of the stock price.

Protests have erupted outside Evergrande's headquarters in Shenzhen, China, from Chinese citizens that have pre-paid for housing that Evergrande was to construct at a future date.

Source

Some economists suggest that a collapse to 300B in debt could instill a financial meltdown that will lead to a new financial crisis similar to or even worse than 2008. (CNBC).

The situation has reached a critical moment and bankruptcy of this size could create a financial shock that will affect the global economy for a long time.

The negative sentiment in the stock markets is also reflected in cryptocurrencies, dragging prices lower by ~10%.

China’s Big Plans for growth and expansion

The Chinese government has expressed optimism about economic results that will double the GDP of the country and make it the world’s first economy. An event that may happen in a period between 10-20 years from now.

The strategy is clear, having a centralized state-controlled economy, that also leaves significant territory for private investment. The economic model is not solid communist but mixed, although with high intervention standards and restrictions.

Currently, most of the production is not state-owned, since the experimentation of capitalism has allowed the Chinese economy to grow in various sectors that were previously not considered strategic.

The Chinese economy, though, is not a free market. Business is under strict regulation and scrutiny. Often, even the CEOs of top companies like Alibaba are interrogated by the authorities and may even not appear in public view for a long period. It is a completely different economic model from both capitalist and Socialist/Communist states.

In Conclusion

There are often voices that express negative sentiment, especially right after the 2008 economic crash. A few investors and economists had foreseen such catastrophic events, and they became famous for betting against the euphoria of those days.

However, there have also been far too many analysts that were expressing similar concerns throughout the last decade and completely failed with their predictions.

There can be signs of economic malfunction, but there is also difficulty in predicting the extent of events. The economic cycles are sometimes violent (both to the upside and downside) and the one factor that is of utmost importance is the interest rates.

Usually, the complications begin when sudden liquidity issues appear and Central Banks are basing their response on increased money printing that lowers interest rates. However, this only alleviates the real problem and doesn’t fix it. On a macro scale, it passes the weight of economic recovery from the failed business to the taxpayers.

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Comments

Seems to be that the only way to stop the dam (analogy to the Three Gorges Dam) from bursting is for the CCP to put a finger in it. In this manner it may be likely that they nationalize Evergrande and print more fiat as well as devalue their Yuan.

$ 0.05
2 years ago

Perfect explanation. I gave you all I had money wise. I would add one humungous thing to your otherwise excellent article: this is precisely what the global elite were looking for! Now it is time for them to go all in on a global digital currency. You know as well as I do it has been in the minds and works for decades. This is definitely a Black Swan event in history.

$ 0.05
2 years ago

Evergrande is not the only one who face financial crisis but many businesses loss millions or even billions because of pandemic outbreak. Many investors poll out their stock and stock market price is very low but good thing is slowly recover now.

$ 0.06
2 years ago

I think stocks recovered too fast, it only took a few weeks to cover the huge dip in late March and stock prices were pumping for more than a year. Some companies became completely state backed (transportation sector). Oil was selling at negative since there was no containers available, yet it also recovered immediately. But there is a price to pay there. A huge debt that has been created for most economies.

$ 0.00
2 years ago

Watch for the squeeze on AMC. The hedgies cannot cover.

$ 0.05
2 years ago

What do you think would happen next?

$ 0.00
2 years ago

Probably we are worried too much. It is mostly a problem inside China and hopefully the rest of the world won't be affected.

$ 0.00
2 years ago

Veremos si se derrumban o no. Es cuestión de dejar pasar el tiempo que el único con la palabra final. Pero creo que no será más malo que lo del 2008. Aunque lo más seguro es que abran más a seguir. Linda tarde amigo mio. Te saludo desde Cuba

$ 0.00
2 years ago

Greetings yesi! Thank you for the comment. I agree with you, it will not be the beginning of another 2008 moment. It can be managed and I think that within crypto's we have more safety.

$ 0.00
2 years ago

It will be interesting to see if they let it fail or keep it above water like they did with American companies.

$ 0.00
2 years ago

China may have to step in in some fashion similar to what the U.S. government had to do in 2008. I guess we shall just have to wait and see. This does not seem as bad as what we saw in 2008, but of course this just the first thing to topple. I am sure there will be others to follow much like happened in 2008.

$ 0.05
2 years ago

Probably there will be some action from China. It is what scares the markets today, at least I think it is the reason. We will see.

$ 0.01
2 years ago

Read about this last week the fear they were saying was that chinas goverment were willing to let in collapse but they also said it was 600 billion in debt

$ 0.00
2 years ago

Most media like bloomberg and investing.com talk about $300billion. I haven't read about 600 billion, if you have a source I'll be glad to find out more.

$ 0.00
2 years ago

Think it was cnbc article

$ 0.00
2 years ago