China’s Evergrande has been in the news lately, but not always in an understandable way. The real estate developer is just too big and its financial arrangements too obscure to be easily grasped by people with a lot of other things on their plates. Plus, China has had plenty of corporate implosions in the recent past and the CCP/BoC has always stepped in and saved the day. So why worry this time?
Because this time is apparently different, writes Credit Bubble Bulletin’s Doug Noland. Here’s a quick excerpt from a much longer piece he published this morning:
Evergrande owes over $300 billion – to banks and non-bank financial institutions, domestic and international bond holders, suppliers and apartment buyers. It has bank borrowings of $90 billion, including to Agricultural Bank of China, China Minsheng Banking Corp and China CITIC Bank Corp. (reports have 128 banks with exposure). Thousands of suppliers are on the hook for $100 billion.
It appears an Evergrande debt restructuring is inevitable. From a few decades of close observation, these types of situations generally prove worse than even the more bearish analysts fear. Assume ugly and messy. The presumption all along – by bankers, investors and apartment purchasers – was that Beijing would never allow a collapse of such a huge player. This fundamental market perception is in serious jeopardy.
Evergrande is the most indebted of a highly levered Chinese developer sector (top three in revenues). It “owns more than 1,300 projects in more than 280 cities.” Evergrande employs 200,000 – and “indirectly helps sustain more than 3.8 million jobs each year.”
From CNN (Michelle Toh): “Outside housing, the group has invested in electric vehicles, sports and theme parks. It even owns a food and beverage business, selling bottled water, groceries, dairy products and other goods across China. In 2010, the company bought a soccer team, which is now known as Guangzhou Evergrande. That team has since built what is believed to be the world’s biggest soccer school, at a cost of $185 million to Evergrande. Guangzhou Evergrande continues to reach for new records: It’s currently working on creating the world’s biggest soccer stadium, assuming that construction is completed next year as expected. The $1.7 billion site is shaped as a giant lotus flower, and will eventually be able to seat 100,000 spectators.”
Evergrande epitomizes China’s historic Credit Bubble. It has borrowed and spent lavishly, in what history will surely view as a company that operated at the epicenter of an extraordinary Bubble of asset inflation, speculation and reckless debt-financed mal-investment.
Estimates have Evergrande bondholders receiving 25 cents on the dollar in a restructuring. It borrowed $20 billion in the booming off-shore dollar bond marketplace. As a focal point of the global Bubble in leveraged speculation, China’s offshore debt market has ballooned during this protracted cycle. From the FT (Hudson Lockett and Thomas Hale): “Chinese issuers face their largest-ever wave of dollar bond maturities this year at $118bn, according to Refinitiv. But even that is dwarfed by the Rmb7.8tn ($1.2tn) of onshore debt maturing in 2021. The latter figure could have big repercussions for offshore bondholders, especially if the restructuring of onshore debt is prioritised.”
“Money” has flooded into China this year, in yet another example of the incredible “Terminal Phase” dynamic, where speculative finance inundates a system even in the face of acute Bubble fragility. Unwieldy speculative flows only exacerbate systemic vulnerabilities. Trouble for Evergrande, the developers and Chinese high-yield debt marks a momentous inflection point for Chinese and global leveraged speculation.
The takeaway? Everyone with money invested in or lent to a big entity with convoluted finances is going to pull back, either selling part of their stake or demanding payment on their loans. At a minimum, they’ll refrain from further investment.
This kind of phase change in market sentiment driven by a large corporate implosion is now known as a “Lehman Moment” after the failure of Wall Street investment bank Lehman Brothers that is blamed for kicking off the Great Recession.
Evergrande is vastly bigger than Lehman and today’s world is vastly more leveraged and therefore fragile than that of 2007. In another popular turn of phrase, the bubble may have found its pin.