CHINA EVERGRANDE GROUP DEFAULT RISK

Evergrande-group-logo

China Evergrande Group is up to its eyeballs in debt owing some $300 billion. The risk of default is scary enough to affect the world’s stock markets. Evergrande is set to default on at least one tranche of bond interest payments totaling around $120 million, due at the end of September. Only two emotions matter, greed and fear.

Evergrande is the second biggest property developers in China and they are in big trouble. They sells apartments mostly to upper and middle-income dwellers. In 2018, it became the most valuable real estate company in the world. Today the company is more diversified but the company is overleveraged.

For nearly three decades, Evergrande – like dozens of Chinese developers – bet big on China’s booming infrastructure buildup. It took out loans often carrying double-digit interest rates, and gambled that its sales of yet-to-be-built apartments would be high enough to service ballooning debt. Financial regulators tolerated these risky lending practices because of how developers like Evergrande helped generate huge amounts of property wealth and as well as land sale revenues for local governments, while turning millions of citizens into homeowners.

Chinese regulators will intervene to stabilize the problem but the solvency problem is difficult. China has been increasingly concerned with the growing debt levels.

China has been using the trickle-down economic approach which has been discredited in the western world. China however has been looking at socialism more closely as it pertains to their own needs. Northern EU nations are stronger than southern nations. The lack of education has been a problem which will take a few generations to overcome. Television and internet have helped shape social values but care must be taken not to present some programming like North Koreas offers.

In advanced economics the idea of a bubble has studied for several decades. China has expanded substantially but the high debt load has been risky. A lot of property developers are paying above 10% interest but the high profits from development are so far been adequate. Fear that Evergrande could trigger systemic risks in China rocked global markets earlier this week, spurring a slew of analysts to argue that Beijing would provide enough support such that it won’t become a Lehman moment. At least seven Chinese banks have in recent days sought to assuage investors over their exposure. 

The real question, is it to big to fail? Saw this when Paulsen called 19 bankers to a meeting. The TARP was a necessary step due to banks indulging is risky trades. Lehman was the fall guy. Does China need to unwind Evergrande?