As market analysts count the yuan and investment observers warn of the impending economic doom from Evergrande’s decline, it is easy to miss the human tragedy involved in this dire situation. The story continues to intensify by the day, with folks storming headquarters and investors threatening to kill themselves after parking their life savings in one of the world’s largest companies. Will Beijing attempt to contain the crisis, or will President Xi Jing and the Communists allow the “too-big-to-fail” business to crumble? The Chinese government might be adopting a wait-and-see approach before handing the real estate developer a blank check to ensure it does not default, properties are constructed, and shareholders are rescued from the depths of default hell.
Evergrande Share Trading Suspended
Asian markets were taken aback on Oct. 4 when shares in Evergrande and its property management unit were suspended from trading. The developer noted in a stock exchange filing that trading was halted because of an announcement of a “major transaction.” According to Cailian, a Chinese financial news publication, Hopson Development Holdings, whose shares were also stopped, plans to purchase a 51% stake in Evergrande. Hopson is owned by Chu Mang Yee, who is described by local media as an “invisible magnate.”What do markets think of the potential move? Hopson’s dollar notes endured their biggest losses on record, with the 6.8% dollar bond due 2023 sinking 4.9 cents, while its 7% note due 2024 also fell five cents.
Ain’t Investing Evergrande?
Evergrande missed its second unpaid offshore debt payment in a week on Sept. 29, despite the cash-strapped housing juggernaut’s frenzy trying to meet its obligations. The organization was scheduled to make a $47.5 million bond interest payment on its 9.5% March 2024 dollar bond. This comes less than a week after it failed to execute $83.5 million worth of coupon payments. Because these types of payments are usually given a 30-day grace period, international investors are waiting to see if Evergrande will pay their obligations or swallow these losses.
Over the next month, more than $162 million in dollar bond coupon payments will be due.
Will Wall Street Bail Out Evergrande?
Marathon Asset Management, a distressed-debt specialist, announced that it would begin buying Evergrande’s debts. CEO Bruce Richards revealed to Bloomberg Television that it purchased new debt issued by the property giant, adding that Marathon will continue to buy more at the current low prices. Although he believes that the company will need to be restructured and might kick the can down the road by saving face with short-term debt payments, Richards noted that there are “absolutely opportunities” in acquiring Evergrande bonds.
It’s Costly to Short Evergrande Stock
According to new data from research firm FIS Astec, it is becoming increasingly expensive to borrow Evergrande shares. Short sellers, individuals who borrow shares, sell them, and repurchase them for a lower price, are paying an annualized rate of 92% in the week ending Sept. 23. This is up from 50% earlier last month. That said, Evergrande has created a contagion event because borrowing costs for other developers have also surged. For example, Guangzhou R&F Properties’ shares increased at an annualized rate of 6.6% during the same period.
Online Censorship Grows
Shareholders who Evergrande owes money are unable to organize demonstrations because of escalating censorship efforts. It has been reported that many instant messaging groups have been blocked on the WeChat platform, likely because they have tried to organize protests and discuss the claims they have made against the entity. China’s Ministry of Public Security did not comment on the reports.
The Collapse of China’s EV Market?
The world’s second-largest economy has manufactured one of the biggest new energy vehicle (NEV) markets on the planet. But, as a plethora of companies tried to grab a share of the pie, the government conceded that there were too many businesses. Evergrande’s $87 billion electric car business has not been immune to the economics of the green industry. Not only has it yet to sell any of its Hengchi No. 1, 3, 5, and 6 automobiles, but it is also going through challenges paying its debts. Could a default happen, too? Evergrande chose not to pay some of its employees, and it has fallen behind on payments to factory equipment suppliers. Ultimately, this is another arm of its empire that could be chopped off out of survival.
Blame Hu Jintao?
When Hu Jintao was president of China, he transitioned the Red Dragon from a saver to a deficit-financed spender. His successor, Xi Jinping, expanded this economic doctrine. From enormous credit growth to astronomical borrowing in all areas of the economy, Beijing’s debt troubles have worsened during each domestic and global financial crisis. And its problems could only get worse. Fitch Ratings estimates that state-owned enterprises with weak credit profiles and approximately $100 billion worth of bonds are set to mature over the next 12 to 18 months. Local government debt has topped $8 trillion, while a wave of companies, such as Yongcheng Coal & Electricity Holding Group, is failing to make principal and interest payments. It is why Xi agreed to liberalize Chinese financial markets.
When executives are selling their luxury vehicles and houses because Evergrande did not pay them, or shareholders are threatening to take their lives, the iconic line from the classic 1974 Roman Polanski motion picture springs to mind: “Forget it, Jake. It’s Chinatown.” In other words, nobody will repair the Asian powerhouse’s 99 problems – it is a futile endeavor.
~ Read more from Andrew Moran.