Is Evergrande China’s Lehman? No, it isn’t. But it may very well be its Countrywide Financial.
Countrywide rose spectacularly on the back of the US real estate bubble by writing an enormous amount of home mortgages that were packaged by Wall Street into all kinds of MBS (mortgage backed securities). At the top of the bubble, lenders couldn’t care less about the creditworthiness of the borrowers.
Countrywide’s collapse was one of the first signs that the Credit Bubble had burst. Its stock started plunging in mid 2007 and the company was bought out by Bank of America in January 2008 (BOA has regretted it ever since).
Lehman, on the other hand, filed for bankruptcy much later, in September 2008.
Evergrande is one of China’s largest real estate developers, concentrating on building and financing huge residential properties. It finances its projects through… did you guess it?… bond-type investment products sold to retail and institutional investors. So, no, Evergrande is not Lehman. But it looks awfully similar to Countrywide.
It'll be interesting to see what this does to Chinese companies' access to offshore bond markets in the future.
ReplyDeleteI’m keeping a close eye on Evergreen for another reason:
Deleteif the company decides to pay and/or work out its domestic debt quickly, but lets foreign lenders “hang”, then it sends a very very powerful message that China’s leaders are choosing to clash with the ferengi. Obviously, this is a very political and strategic decision, the country’s leadership is going to be involved.
Well, so much for that. It's off to the races again! Huge rallies everywhere. It's systemic now, it seems, bull markets are.
DeleteMaybe no real mega-crash, but just a series of multiple mini-crashes, in order to shake-out leveraged daytraders, which almost immediately rally back...
DeleteLike Hellasious, I have also been curious as to whether foreign investors will be bailed out or left hanging. I'm also curious to what extent Chinese firms and individuals will be repatriating foreign holdings and assets - whether to shore up teetering balance sheets, in resonse to domestic political pressure, etc. In years past, the US and Western Europe were behind many hot money flows in and out in lesser developed markets and countries. Now, with China's massive wealth (and debt), the US and others may find themselves impacted by outflows if serious repatriation does occur.
DeleteSo far, it looks like foreign lenders to Evergrande are being left to hang. The dollar bond interest payment date (yesterday) passed without even a word from Evergrande's management. I cannot imagine that they did this without consultation with China's political leadership.
DeleteIn re, China repatriating US/Western investments: I have noticed that China has been a net seller of US Treasury bonds in recent months. Nothing big, but it's a departure from being a net buyer for years. And that is perhaps more meaningful when we consider the record amount of Treasuries issued in the last 18 months.
love your perspective. =)
ReplyDeletemy gut feeling is that the evergrande situation is far, far, far worse than what is reported....
ReplyDeleteThe thing is that there is no possibility of panic in China and there is a strong tradition of faking the books. Thus, an entity will only collapse when it has become utterly impossible to fake the books.... which is a scary thought.....
"...an entity will only collapse when it has become utterly impossible to fake the books...."
Deleteor perhaps when the Chinese leadership decides on a major course change in global economics and geopolitics. I thinks this is happening right now.
hmmm.... I feel like it is the other way round... they think it is going down and are trying to pretend they are in control...
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