Over the last days Evergrande China, the 2nd largest property developer in China after revenue, was in all financial news. More than 1.5 million homes are planned by Evergrande and it has $300 billion in liabilities.
There are fears that Evergrande China will cause another financial crisis like in 2008, comparable to the Lehman Brothers insolvency. I am watching this very carefully. Most of my personal Assets are stocks and a big decline in the stock market could mean damage comparable of loosing multiple yearly incomes to me.
Seems like that #Evergrande problem already affects the financial markets…— Christoph Miksche (@CMiksche) September 20, 2021
If they company fails to pay the liabilities it could cause a systematic insolvency because the banks wouldn’t the get money and the market would be flooded with very cheap homes which could cause insolvency of other property developers.
The problem would affect China first because western banks don’t have a big share in the 300 billion - mostly Chinese banks gave the money but if there would be a systematic failure in China the rest of the world would feel that too.
Most countries have strong trade relationships with China - e.g. the German Car industry sells most of the Cars in China.
It’s not only real damage, fears of that situation already caused a decline in nearly every stock market index.
The Solution (Opinion of Experts)⌗
As far as I understand it most experts believe the chinese government will support the competition to takeover parts of Evergrande and solve the problem that way without a crisis.— Christoph Miksche (@CMiksche) September 21, 2021
If that doesn't happen we could have a Lehman moment.
Most Experts think this will be solved like Long-Term Capital Management. To make it short: in the LTCM case, the competition took over parts of the business and the government supported it.
Over the last months the chinese goverment destroed whole sectors (e.g. E-Learning) without any help - so I wouldn't bet on support.— Christoph Miksche (@CMiksche) September 21, 2021
Also the company already tried to sell parts without much success and the competiton already has high debts...
The solution which the Experts share has two assumptions:
- The government is interested to help solving the issue.
- The competition can take over parts from Evergrande
I have very high doubts that this assumptions are correct.
About 1: In the last months, China created rules which destroyed whole sectors. E.g. they destroyed the whole E-Learning sector. It is basically forbidden to sell E-Learning services. So it doesn’t look like the top priority of the government would be supporting financial markets or companies. It looks more like it is more important to them that the government is stronger than companies. Letting financial markets fail could cause a big financial trouble but it actually could be in the favor of the politicians who want a strong government and weak companies.
Western “Experts” make the assumptions China would act like a capitalist nation, but China isn’t the US. So we can’t expect they make the same decisions as we would make. They have different interests and priorities.
About 2: The competition has also debts. I am not sure if they are strong enough to take over such a big transaction. Remember: more than 1.5 million homes and 300 billion liabilities.