It seems that the Evergrande Group, the great-grandfather of the Chinese real estate bubble, is finally collapsing. What does it look like?
Simply put, investors, lenders, and apartment owners lose. The insider wins. China’s financial system is still going on. Governments at all levels are cracking down.
Evergrande is now swirling the drain and the world is waiting for it to go down. The stock price of its parent company, 3333HK, has fallen 76% since the beginning of the year. In August, Xu Jiayin, the founder of Evergrande Group and one of the wealthiest men in China, resigned as chairman of the real estate group. Corporate bond trading has been suspended in Shanghai. Police landed on Evergrande’s office building in Shenzhen on Monday, gathering individual investors in the company’s myriad “wealth management” products to demand repayment.
Two things that make the company’s pain very dangerous to the Chinese government are its size and its impact on the Chinese who thought they had bought a middle-class ticket. Both confidence in the government’s wisdom and ability to lead Chinese families into a prosperous future and the belief that investment in real estate and real estate-based assets will not fail must be irreparably hit. not.
First, scale. The publicly recognized debt is $ 300 billion. This is 2.4 times the $ 123.8 billion cost of the savings and loan industry bailout to the U.S. government between 1998 and 1999, and 169 billion of the direct cost of bailouts for Chinese banks from 2000 to 2001. It was twice the dollar, and both had a huge impact on each. Economy.
Second, the number of people affected. Evergrande is essentially a pongee, using that cash to further pre-sale an ever-growing number of apartments and collect cash from hundreds of thousands of retail investors, accelerate construction in progress and fund overpayments. Fund the sale. Like any other pongee, this works as long as it’s accelerating. However, it is the same end that is inevitable for all pongee. As the market slows, these cash inflows begin to lag behind the growing arc of cash demand. According to media reports, Evergrande currently has about 800 unfinished projects, with about 1.2 million people waiting to move in.
But worse, the early purchase of residential real estate in China became a pure financial investment long ago. Private real estate became a reality as state-owned enterprises offloaded housing assets to employees in the late 1990s. Urbanization is progressing, and a significant number of nouveau riche real estate traders have emerged in the young and vibrant market.
However, by the time of the global financial crisis, oversupply was apparent and there was little real market support for annual claims of ever-increasing value. Therefore, for more than a decade, Evergrande apartments have been regarded as a treasure trove of value, a type of savings bond made of steel and cement. Chinese apartments are the perfect investment tool for those looking for a middle class who don’t trust banks for good reason.
Few buyers buy an Evergrande apartment as their primary home. And Evergrande responds clearly to these people, choosing a location just outside the area that limits the number of units they can buy, and promoting their development as a second home. Throughout China, clerk and factory workers are sitting in empty, evergrande apartments and dream of selling them with big markup to cover their children’s study abroad and retirement benefits.
Personally, despite living in China for 25 years, the biggest public anger I’ve seen in China isn’t random arrests, abuses, bribes, shakedowns, or even car accidents, but property value. Is over. Hell isn’t as angry as a Chinese investor who has lost money in a declining Evergrande loan derivative or apartment. In fact, WeChat and TikTok are full of videos of protests at Evergrande’s office (posted earlier than they can be deleted). Evergrande reportedly told employees in Shenyang, Liaoning Province to work from home to avoid protests.
The Chinese government may force restructuring to cauterize bleeding. What does it look like?
Let’s look at some historical examples. First, wealth management products or WMP bailouts, Chinese versions of mortgage-backed securities, financial sausage casings where banks and brokers pack mortgages, equity and fixed income derivatives, private equity investments, and all other types of financial products. These are the means by which the Chinese people have made a huge investment. And they obviously don’t even pay the principal, much less returns.
The last announced WMP bailout will allow a consortium of banks to refinance the approximately $ 500 million hole left by the Credit Equals Gold WMP default used to fund dead coal companies in 2014. It was when I needed it. The original trust behind the product has regained that money. The loss was absorbed by the bank. Banking regulators in China then sought to force banks to reduce their exposure to off-balance sheet debt. This reached about 90% of GDP for some accounts. The new regulation forced the merger of many banks and saw many small regional banks go bankrupt quietly. However, banks often responded in the same way as banks by reclassifying off-balance sheet debt, but not necessarily. This may be part of what is behind the government’s determination to eradicate Ant Financial.
Some restructuring cases:
1. Kaisa Group: The developer was accused of defaulting on bonds of about $ 2.5 billion in 2015 and producing a financial report claiming a large cash balance. The restructuring agreement did not dilute 49% of the founder’s family or 30% of the shares owned by Sino Life. Bondholders have received the option of refinancing with deep haircuts or high yield bonds. The local government, albeit in its property sector, quietly took over many projects.
2. Dalian Wanda: The developer reorganized in 2017 by selling assets in the United States, Europe and Australia, including the AMC Theaters chain, the Spanish football club and Atletico Madrid. In 2021, Wanda was still struggling to repay its $ 56 billion debt. In 2013, Forbes rated its founder Wang Jianlin as the wealthiest man in China. He is still worth nearly $ 15 billion.
3. HNA Group: The Chinese government has forced the integration of hundreds of affiliates of this company, causing widespread defaults by HNA affiliates such as Bohai Leasing, Irish company Avolon Holdings, Hainan Airline Holdings. China’s bankruptcy court said 67,400 creditors had claimed 1.2 trillion yen.Losers include Hilton Grand Vacations (HGV) shareholders