Evergrande Bank Collapse - Lehman's Moment?

[Rimbaud]

This could be the big one.

Evergrande: Why should I care if China property giant collapses?

The crisis at the heavily-indebted property giant deepened as a Hong Kong court ordered it to be wound up.

www.bbc.com

China: What is Evergrande and is it too big to fail?​

Global stock markets have been on high alert as crisis-hit Chinese giant Evergrande faces a key test this week.
The world's most indebted real estate developer is due to make interest payments of $84m (£61m) on its bonds this Thursday.
Earlier in the week, the company started to repay investors in its wealth management business with property as it struggled to find cash to meet its liabilities.

Why is Evergrande in trouble?​

Evergrande expanded aggressively to become one of China's biggest companies by borrowing more than $300bn (£217bn).

Last year, Beijing brought in new rules to control the amount owed by big real estate developers.

The new measures led Evergrande to offer its properties at major discounts to ensure money was coming in to keep the business afloat.

Now, it is struggling to meet the interest payments on its debts.

This uncertainty has seen Evergrande's share price tumble by around 85% this year. Its bonds have also been downgraded by global credit ratings agencies.

Why would it matter if Evergrande collapses?​

There are several reasons why Evergrande's problems are serious.

Firstly, many people bought property from Evergrande even before building work began. They have paid deposits and could potentially lose that money if it goes bust.
There are also the companies that do business with Evergrande. Firms including construction and design firms and materials suppliers are at risk of incurring major losses, which could force them into bankruptcy.

The third is the potential impact on China's financial system.

"The financial fallout would be far reaching. Evergrande reportedly owes money to around 171 domestic banks and 121 other financial firms," the Economist Intelligence Unit's (EIU) Mattie Bekink told the BBC.

If Evergrande defaults, banks and other lenders may be forced to lend less.
This could lead to what is known as a credit crunch, when companies struggle to borrow money at affordable rates.
A credit crunch would be very bad news for the world's second largest economy, because companies that can't borrow find it difficult to grow, and in some cases are unable to continue operating.

This may also unnerve foreign investors, who could see China as a less attractive place to put their money.

Is Evergrande 'too big to fail'?​

The very serious potential fallout of such a heavily-indebted company collapsing has led some analysts to suggest that Beijing may step in to rescue it.

The EIU's Mattie Bekink thinks so: "Rather than risk disrupting supply chains and enraging homeowners, we think the government will probably find a way to ensure Evergrande's core business survives."

Others though are not sure.

In a post on China's chat app and social media platform WeChat, the influential editor-in-chief of state-backed Global Times newspaper Hu Xijin said Evergrande should not rely on a government bailout and instead needs to save itself.

This also chimes with Beijing's aim to rein in corporate debt, which means that such a high profile bailout could be seen as setting a bad example.

What does Evergrande do?​

Businessman Hui Ka Yan founded Evergrande, formerly known as the Hengda Group, in 1996 in Guangzhou, southern China.

Evergrande Real Estate currently owns more than 1,300 projects in more than 280 cities across China.

The broader Evergrande Group now encompasses far more than just real estate development.

Its businesses range from wealth management, making electric cars and food and drink manufacturing. It even owns one of country's biggest football teams - Guangzhou FC.

Mr Hui has a personal fortune of around $10.6bn, according to Forbes.

The Chinese economy is opaque and it is hard to tell exactly how serious this will be.

However, this could well be the housing bubble in China finally popping.

China's property price to income ratio is one of, if not the, highest in the world - more than double that of the UK.

Chart of the Week: China’s house-price-to-income ratio exceeds 17 | Lipper Alpha Insight | LSEG

Over the years, Fathom Consulting has created a wealth of proprietary indicators, a handful of which were released on Refinitiv’s Chartbook last year. As part of a major expansion of

lipperalpha.refinitiv.com

State intervention has kept the housing market afloat by kicking the can down the road as long as possible. This is because so much wealth is tied up in property in China, and also because construction is still the main fuel of economic growth, and provides business for the steel sector and others which suffer from serious overcapacity.

Correspondingly there has been a sell-off of metal stocks as a result of Evergrande's troubles:

Evergrande crisis: Metal index down 6.8% amid fears of lower China demand

Analysts, however, see the fall in iron ore prices a lead indicator and expect steel prices to decline soon

www.business-standard.com

Contagion to other property developers also appears to have begun:

Evergrande effect! Chinese property developer Sinic shares tank 87% today, trading halted

Shares of Sinic holdings fell 87 per cent to hit a low of 0.50 Hong Kong cents. Sinic Holdings is an investment holding company, which along with its subsidiaries, is principally engaged in property development and property leasing, according to Reuters.

m.economictimes.com

Protests by people demanding money back from Evergrande have broken out outside Evergrande offices, with some of Evergrande's management taken hostage:

Evergrande employees in China held hostage as worried investors demand payments

Retail investors in China are taking drastic measures to get money back from embattled property developer. Read more at straitstimes.com.

www.straitstimes.com

There seems to be a lot of complacency from Wall Street etc who seem confident that the Chinese government will come to the rescue.

I'm not so sure though. They have yet to announce anything about a bail out. Chinese corporate and public debt have mushroomed over the last 10 years and it may be difficult to shift liabilities worth 2% of China's GDP onto already burdened SOEs, and doing so will just delay the inevitable correction for longer.

More tellingly, recent actions from the CCP suggest they are tightening social and ideological controls and preparing for hard times.

So this could turn out to be a very big deal.

 

[not-bono-ever]

Holiday time in China. Lots of scurrying about to fix the issue. They have about $40 billion of cash stuff scheduled to go out in the next year. More impactful that Lehman’s in some ways due to the nature of its business ie naked exposure to loads of peopleand huge indebted asset base that people don’t want to pay full price for. Brace yourselves. Much of evergrande assets have been shifted to a newco offshore. There might not be much of a carcass to feed on

 

[Flavour]

Yeah it's massive news this, the speculative Chinese housing bubble was bound to burst badly sooner or later

 

[yield]

Evergrande Borrowed From Everyone
bloomberg.com 21/09/21

It seems to me that what is interesting about Evergrande is not so much the magnitude of its debt problems but their variety. Evergrande owes money to Chinese banks. It owes money to foreign hedge funds, and foreign investors own its stock. It owes money to suppliers, and to Chinese retail investors in those wealth management products. And it owes apartments to buyers. And the retail investors who bought Evergrande wealth management products were often also Evergrande homeowners, because the products were sold at Evergrande buildings

And it also sold the wealth management products to employees:

When the troubled Chinese property giant Evergrande was starved for cash earlier this year, it turned to its own employees with a strong-arm pitch: Those who wanted to keep their bonuses would have to give Evergrande a short-term loan.

Some workers tapped their friends and family for money to lend to the company. Others borrowed from the bank. Then, this month, Evergrande suddenly stopped paying back the loans, which had been packaged as high-interest investments. …

The extent of the campaign and how much money it might have raised were unclear. Employees were told to each invest a certain amount of money in Evergrande Wealth products, and that if they failed to do so, their performance pay and bonuses would be docked, employees told Anhui.

 

[flypanam]

Adam Tooze has released something on his stack about this, haven’t read yet but I’m sure it’s interesting

Adam Tooze's Top Links: Is Evergrande "China's Lehman moment"? (#21)

Stuff to read and listen to ahead of a nail-biting week.

adamtooze.substack.com

 

[bimble]

already burdened SOEs

what is an SOE?

 

[maomao]

what is an SOE?

State-owned enterprise.

 

[not-bono-ever]

Adam Tooze has released something on his stack about this, haven’t read yet but I’m sure it’s interesting

Adam Tooze's Top Links: Is Evergrande "China's Lehman moment"? (#21)

Stuff to read and listen to ahead of a nail-biting week.

adamtooze.substack.com

Consensus is that central command will ensure anything related to the collapse is orderly. As much as it can be I suppose. The background politicking within the PRC is real strong arm direction these days. Plenty of stress

 

[Rimbaud]

Why China's Evergrande Crisis Could Be Worse Than the U.S. Crash

Why China's Evergrande Crisis Could Be Worse Than the U.S. Crash​

With 30% of its GDP at risk, China’s economy is more vulnerable to a real estate bust than either America’s or Japan’s was when their bubbles burst.

The world is anxiously watching the Chinese housing market, in the wake of property developer China Evergrande Group’s potential default. Market watchers have been drawing comparisons to the U.S. crash in 2008, and some even to Japan’s property bust two decades earlier. But although there are some similarities, China’s situation is fundamentally different from either of those two episodes.

The most obvious comparison for a potential Chinese real estate crash is the U.S. housing bubble that burst after the fall of Lehman Brothers. By now, we know that land bubbles are especially pernicious since they involve so much debt. When they pop, they tend to take the financial system down with them, causing lenders to pull back out of fear of insolvency and illiquidity. That’s what happened to the U.S. But as commentators have been quick to point out, China is not really in danger of this kind of scenario, because the government controls the banks. If President Xi Jinping tells Chinese banks to continue to lend, they will do so, no matter what sort of toxic Evergrande-style sludge is on their balance sheets.

Japan’s bubble and crash in the early 1990s is an example that relatively few outside the country understand, but which many may instinctively associate with China because both countries are in East Asia.

In the late 1980s, Japan’s efforts to catch up to the West had come to full fruition, but its growth was correspondingly slowing. In an effort to sustain the growth they were accustomed to, Japanese banks got into real estate finance in a big way, helped by deregulation, low interest rates and a strong currency. So far, this sounds a bit like China. Every time China’s economy is in danger of slowing, it commands banks to lend, and they mostly lend to real estate and associated industries like construction. This is a more deliberate version of what Japan did, but the impetus to sustain rapid growth is probably similar.

Another factor that helped pump up Japan’s bubble was its financial system. Unlike in the U.S., most companies borrowed from big banks instead of issuing bonds. To get loans, companies needed collateral, and the collateral banks were most eager to accept was land. That increased the demand for urban real estate, pumping up the price bubble, but it also exacerbated the collapse on the way down; when companies’ collateral depreciated, banks wouldn’t lend to them anymore, forcing them to curb operations.

Again, this is unlikely to be a problem for China. Chinese companies certainly have a ton of debt, but if real estate isn’t part of their core business, it probably doesn’t matter for bank lending if their land holdings depreciate; the government can still just direct loans their way if it wants. Companies that depend on real estate or construction — and local governments that finance themselves with land sales — will certainly take a huge hit if the property sector goes down, but manufacturers and other companies will likely be safe, unlike in Japan.

So that’s the good news. Basically, both the U.S. and Japan had capitalistic financial systems where lenders could and did pull back when real estate crashed; China has no such vulnerability.

But in every respect except financial stability, China’s economy is more vulnerable to a real estate crash than either America’s or Japan’s was. Real estate and related industries account for almost 30% of China’s GDP — a far higher share than the U.S. at the height of its boom. If Xi is really serious about shifting the Chinese economy away from real estate and toward manufacturing, as he has declared, it will be a painful adjustment. If he uses Evergrande’s fall and a resultant real estate crash as the occasion to make that structural shift, the pain will be even greater because it will be concentrated in a short amount of time.

To make matters worse, Chinese citizens are extraordinarily dependent on real estate for their nest eggs — the homeownership rate is 90%, and it’s estimated that urban Chinese people have more than 70% of their net worth in property. This is something Japan didn’t have to deal with; Japanese houses tend to depreciate rather than appreciate, because the government scraps and rebuilds them every so often. So at least when land prices crashed, the middle class wasn’t wiped out. The U.S. middle class took a larger hit, but if China’s land prices go down, the financial carnage among the general populace will be of epic proportions.

Finally, a long-lasting bust in real estate would greatly lessen China’s ability to respond to macroeconomic shocks. Japan and the U.S. use traditional monetary and fiscal policy to fight recessions, but China has always relied on the expedient of ordering banks to lend. Without real estate, there will be far fewer profitable enterprises for Chinese banks to lend to, meaning China will be vulnerable to the next recessionary shock that comes along.

So China’s real estate situation is fairly different from that of the U.S. and Japan in their housing crashes, but in many ways it’s worse. No, it doesn’t have the financial fragility of a capitalist country, but its middle-class wealth, stabilization policy, and long-term growth are more dependent on real estate. Any company invested in China, or who makes a living exporting to China, should be very nervous about the potential fallout from Evergrande.

 

[TopCat]

Did they make their interest payments calls last week then?

 

[Rimbaud]

Did they make their interest payments calls last week then?

Evergrande Appears to Miss $83 Million Payment, What That Means for Company

While Evergrande has not commented about the payments, foreign bondholders have announced that payments have not been received.

www.newsweek.com

Nope

 

[TopCat]

I don’t think Chinese govt will bail them out with taxpayer funds.

 

[gosub]

BlackRock Could See Short End of the Stick in Divvy Up of Evergrande Assets

BlackRock acquired 31.3 million notes of Evergrande's debt between January and August of this year.

www.newsweek.com

 

[Rimbaud]

Looks like it is going down. A deal to sell a stake in the company to a rival has fallen through, and the deadline for missed payments is the day after tomorrow.

Evergrande $2.6bn property unit deal collapses

Evergrande rival Hopson Development was set to a buy a £2.6bn stake in the firm before the deal collapsed.

www.bbc.com

Evergrande $2.6bn property unit deal collapses​

20 October 2021
A deal to sell a $2.6bn stake in the world's most indebted property firm to a rival company has fallen through.

Chinese property giant Evergrande Group suspended its shares on 4 October ahead of "an announcement containing inside information about a major transaction".

It was reported that real estate firm Hopson Development was set to buy a 51% stake in its property services unit.

Both companies halted trading for more than two weeks, but will now resume on Thursday after the agreement collapsed.

The crisis at Evergrande has triggered fears that its potential collapse could send shockwaves through global markets.

Investors have concerns about its more than $300bn (£222bn) of debt.

The firm's shares have fallen by almost 80% since the start of this year. The company's total liabilities are equal to around 2% of China's gross domestic product.

The parties said in separate filings to the Hong Kong Stock Exchange that they were unable to agree on the terms of the deal.
Hopson Development said that Evergrande told it the deal had been terminated on 13 October.
Hopson added: "The company is exploring the options available to it for the protection of its legitimate interests in relation to the agreement."

'No guarantees debts will be paid'​

In a stock market statement, Evergrande Group chairman and founder Hui Ka Yan said the company would "use its best effort to negotiate for the renewal or extension of its borrowings or other alternative arrangements with its creditors", following the deal's collapse.
"There is no guarantee that the group will be able to meet its financial obligations under the relevant financing documents and other contracts," he added.
"If the group is unable to meet its guarantee obligation or to repay any debt when due or agree with its creditors on renewal or extension of its borrowings or alternative arrangements, it would have a material adverse effect on the group's business, prospects, financial condition and results of operations."
In recent weeks Evergrande has struggled to make payments to investors in its bonds and wealth management products.
The indebted property giant reportedly missed interest payments to overseas investors twice in September.
The company has been taking steps to raise money owed to customers, investors and suppliers. It has previously said it was selling a $1.5bn stake it owned in a commercial bank.

The 30 day grace period is up on the 23rd, so we could see an official default soon.

Meanwhile, several other smaller real estate firms have already defaulted, indicating this is not a problem limited to one company. If/when we get an Evergrande default, many more will follow.

Chinese developer Sinic defaults as Evergrande deadline looms

More companies miss debt payments as country’s real estate sector contracts in third quarter

www.ft.com

Chinese developer Sinic defaults as Evergrande deadline looms​

More companies miss debt payments as country’s real estate sector contracts in third quarter​

Sinic Holdings has added to a growing list of defaults across China’s contracting real estate sector as markets braced for a deadline this weekend for developer Evergrande to settle interest payments on its offshore bonds.

Hong Kong-listed Sinic defaulted on $246m of bonds that were due to mature on Monday, based on Bloomberg data, in line with a warning last week and adding to a $206m default from luxury developer Fantasia Holdings this month.

Borrowing costs on Asia’s bond market for riskier corporate issuers have soared in the weeks since Evergrande, the world’s most indebted property developer, missed bond payments in late September and ignited fears globally over a slowdown in China’s real estate sector.

Official figures released on Tuesday, accompanying disappointing gross domestic product data a day earlier, showed real estate output was up 8.2 per cent in the first nine months of this year but down 1.6 per cent in the third quarter year on year, its first contraction in any quarter since the start of the coronavirus pandemic.

Evergrande’s initial failure to pay interest on its dollar-denominated debt on September 23, on which it has yet to make any public announcement, triggered a 30-day grace period that ends on Saturday and could result in a formal default. Advisers to bondholders have complained of a lack of “meaningful engagement” from the company.

Evergrande also had an interest payment due on Tuesday on an onshore bond and had previously said in a statement that it would make the payment. Reuters reported on Tuesday that the payment had been made.

China’s central bank weighed in on the Evergrande situation for the first time on Friday, with a People’s Bank of China official blaming the company for its issues and saying the spillover to the financial system was “controllable”.

Evergrande, which was engulfed by a rapidly unfolding liquidity crisis over the summer, has come to embody wider challenges across China’s property sector. Property contributes more than a quarter of GDP but the sector has faced difficulties after companies came under government pressure to reduce leverage.

In addition to Sinic’s default, a slew of recent downgrades from international rating agencies has highlighted the difficulties facing the sector at a time when data also show sales of new homes are slowing sharply year on year and high borrowing costs are making refinancing expensive.

Fitch last week downgraded the rating on developer Modern Land (China) to C. The developer had earlier in the month moved to extend the maturity of bonds maturing next week. The US rating agency said it “considers the consent solicitation to be necessary for Modern Land to avoid default given tight liquidity”.

S&P on Friday downgraded residential developer China Aoyuan because the rating agency expected “its deleveraging pace to slow amid a tough operating environment”.

Yields on some developers with payments due this week, such as Kaisa Group and Sunac, fell amid reports that the companies would make coupon payments.

 

[8ball]

I don’t think Chinese govt will bail them out with taxpayer funds.

Does the Chinese Govt buy into the fiction of "taxpayer funds"?

 

[Rimbaud]

Evergrande crisis puts PwC role in spotlight

Auditors face rising reputational and legal risks in dealing with Chinese companies

www.ft.com

PwC apparently was persuaded by Evergrande to give it a clean bill of health when it really shouldn't have.

In 2016, Hong Kong-based accounting research firm GMT Research visited 40 Evergrande development sites and concluded that Rmb150bn of asset writedowns were needed — then three times shareholders’ equity. It claimed that for years Evergrande had allowed failed projects such as abandoned hotels to accumulate on its balance sheet without writedowns.

GMT also took issue with how Evergrande classified the car parking spaces and commercial properties in its residential developments in its accounts. It said the company had “persuaded” PwC to accept the classification of these as investment properties, rather than as inventory of assets to be sold.

“Are its auditors asleep?” GMT wrote. “The company is insolvent by our reckoning and its equity worth nothing.”

In Europe, the US, Australia and South Africa, auditors have faced increasing criticism and scrutiny when companies have collapsed. Auditor negligence cases have also become commonplace in insolvency proceedings in recent years.

In Asia, the audit firms have avoided much of this public flogging but reputational risks in this part of the world are growing. Already the Big Four have become caught in geopolitical tensions between the US and China over access to the audit documents of Chinese companies listed in New York. And an accounting scandal at China’s Luckin Coffee over fake sales led to questions about the quality of audit work done by EY.

I'd say that this "oversight" is 100% down to Chinese pressure to deliver the correct results, lest they face threats to their ability to operate within China.

The Communist Party's systematic weaponising of economic leverage over private companies - as well as personal pressure, bribery and blackmailing of key individuals within international organisations - has created lots of small lies about the state of China's economy - minor compromises from the perspective of, for example, PwC auditing Evergrande - which adds to up to a massive misrepresentation of the actual state of China's economy in aggregate.

Another example is the World Bank "Ease of Doing Business" rankings being manipulated by China to give itself a higher rank. This behaviour is absolutely endemic. World Health Organisation at the beginning of the pandemic is another case in point.

China manipulated Ease of Doing Business rankings, no irregularities found in Indian data

Last week, the World Bank decided to discontinue publication of its EODB report following allegations of data irregularities due to pressure by some top bank officials to boost China's ranking in 2017.

m.economictimes.com

This is just the tip of the iceberg. There is also an entire ecosystem of bogus consultancies and due diligence firms which are set up to give the Communist Party line to gullible investors who don't understand how the Communist Party functions and how it is present even in private firms.

In fact China's GDP has been systematically overstated for years, everyone knows it, but the official figures are still taken at face value.

As of 2016, the official size of Chinese GDP was estimated by some studies to be overstated by 12% - by now this is probably more like 15-20%.

China’s economy is 12% smaller than official data say, study finds

Beijing statisticians ‘do not have capacity’ to correct inflated local figures

www.ft.com

China’s economy is about 12 per cent smaller than official figures indicate, and its real growth has been overstated by about 2 percentage points annually in recent years, according to research.

The findings in the paper published on Thursday by the Brookings Institution, a Washington think-tank, reinforced longstanding scepticism about Chinese official statistics.

They also add to concerns that China’s slowdown is more severe than the government has acknowledged. Even based on official data, China’s economy grew at its slowest pace since 1990 last year at 6.6 per cent.

The collapse of Evergrande could lead to a long overdue correction in perception of China's economy.

In recent years China has been claiming it is "opening up" its financial system when it is actually trying to flog its bad debt to foreigners to spread the liabilities around - see the article about Blackrock posted above. The firms buying this debt have likely been influenced by a combination of the ecosystem of bogus consultancies, pressure or deliberately misleading advice from within the Chinese section of their own firm, the macro picture of lots of minor lies and audit firms not telling the truth about Chinese companies, as well as by their own naivety and political cluelessness.

 

[Rimbaud]

China Evergrande will make crucial bond payment to avert looming default – reports

The struggling property giant has wired $83.5m to creditors, Chinese media says, but deadlines loom for another $193m in payments

www.theguardian.com

It seems it has managed to avert default by coming up with the $83.5 million bond payment 2 days before the 30 day grace period was up.

However, it has since missed two more payments. 29th October and 10th November are when the 30 day grace periods expire for these payments, together worth $193 million.

It doesn't look like it is getting a bailout, so those dates are likely the ones to watch for the official default.

 

[two sheds]

I'm sure you're right, but the Big Four don't seem too particular with their dealings in the West either. Private Eye for years saying that a major problem is them doing auditing work for companies they also do very lucrative consultancy work for.

 

[Rimbaud]

I'm sure you're right, but the Big Four don't seem too particular with their dealings in the West either. Private Eye for years saying that a major problem is them doing auditing work for companies they also do very lucrative consultancy work for.

Yeah it's true.

But I have done some China related due diligence work before for a major consultancy firm which shall remain nameless for legal reasons. The China branch of the firm tried to prevent my report going to the client because they felt it was very important this deal went ahead and my findings might have hindered that.

Luckily the Partner of my department held his ground and didn't cave in, but it was a bit of a drama and affected what work we did in future. There can be an indirect cosiness between accountancy firms and their clients in the west, but there are also strict ethical walls and guidelines which have to be followed, and if you declare an interest then you can't work with that client. What you don't have is flak and pressure from within the firm itself and threats to a huge part of your business. Bear in mind that foreign firms establishing a branch within China would have to establish Communist Party Cells, so there are Communist Party branches within almost every international firm operating in China.

Anyway in my case, the client wanted to wave through the deal - the person in charge of making the deal, who had to present our report to their board of directors, had been given an all expenses tour of the location in China, and presumably given luxurious treatment so they felt it would be hard to refuse after being well treated. Chinese media also reported that the deal had already gone through to add psychological pressure. These are the typical strategies and they are quite deliberate. Sometimes prostitutes are used to seal the deal and make it harder still to say no as they have leverage.

Additionally, the Chinese company the deal was with presented their own due diligence report by a Chinese company which was clearly bogus, and presented a western friendly front-man as the main leader of the business, with a ridiculous backstory of being a self made entrepreneur and working with Pepsi and KFC or something, clearly picked by the Chinese side as someone appealing to westerners which to me seemed almost cartoonish, and downplayed the roles of other executives and shareholders who were extremely politically connected and linked to the military, including sanctioned entities.

This is basically how it functions. A disciplined Leninist organisation using multiple front organisations as part of coordinated disinformation campaigns, economic pressure, and various forms of psychological pressure against individuals who are frequently naive and don't understand how China functions is quite different in scale and nature to the more banal forms of corruption you get in the west.

 

[two sheds]

Bloody hell is all I can say to that.

 

[MrCurry]

If this bank falls, as seems very likely, is it a problem only for China or will there be contagion into western financial companies? Could we eventually see a stock market crash over here as a ripple effect of problems starting in China?

 

[Rimbaud]

If this bank falls, as seems very likely, is it a problem only for China or will there be contagion into western financial companies?

Direct financial contagion may be limited, but the effect on global demand for iron and steel and other resources would be a big deal. China's economy stagnating or falling into a deep recession or depression would also hit a lot of other industries. Germany could enter recession due to the effect on demand for cars for instance, and a lot of designer brands would be hit. It could also potentially cause house prices to fall due to a decline in Chinese investors buying properties, or a sell off of Chinese owned overseas properties.

It is hard to predict exactly how it will effect the rest of the world, but China's the second largest economy by some margin so it will certainly have some impact.

 

[two sheds]

Not all of those are bad results tbh

 

[Flavour]

Certain cities (thinking Vancouver, Toronto, Melbourne, Sydney, Auckland) have seen house prices massively inflated by Chinese investment in recent years. Not sure to what extent Chinese investment is responsible for the boom of residential construction in places like Manchester, but I'm sure there's a ton of it in London

 

[ska invita]

wrong thread ..

 

[Part 2]

Certain cities (thinking Vancouver, Toronto, Melbourne, Sydney, Auckland) have seen house prices massively inflated by Chinese investment in recent years. Not sure to what extent Chinese investment is responsible for the boom of residential construction in places like Manchester, but I'm sure there's a ton of it in London

I'd wondered myself about this as I think lots of Manchester city centre development is Chinese, particularly the 'Manchatten' type towers and stuff towards Salford.

East Manchester it's all Far East money afaik.

 

[Part 2]

Seems to be conflicting reports this evening as to whether payments have been met.

 

[yield]

Evergrande, Kaisa cut by Fitch to default after missed payment deadlines

HONG KONG/LONDON, Dec 9 (Reuters) - Ratings agency Fitch downgraded property developers China Evergrande Group and Kaisa Group on Thursday, saying they had defaulted on offshore bonds, while a source said Kaisa had started work on restructuring its $12 billion offshore debt.

The downgrades to so-called "restricted default" status come even though Evergrande(3333.HK) and Kaisa(1638.HK) have not officially announced defaults that could result in drawn-out debt restructuring processes.

The fate of Evergrande, which has more than $300 billion in liabilities, and other indebted Chinese property companies has gripped financial markets in recent months amid fears of knock-on effects around the world, although Beijing has repeatedly sought to reassure investors.

 

[Rimbaud]

First Evergrande and Kaisa, now Shimao:

Why Shimao is the latest Chinese property developer to worry investors

Worries over Shimao come a week after Evergrande and Kaisa were officially labeled defaulters.

fortune.com

Shimao is the latest Chinese property developer to worry investors—here’s what’s happening​

Worries over Shimao come a week after Evergrande and Kaisa were officially labeled defaulters.​

BY
BLOOMBERG
December 13, 2021 11:17 PM EST


Never miss a story: Follow your favorite topics and authors to get a personalized email with the journalism that matters most to you.
A sudden plunge in Shimao Group Holdings Ltd.’s bonds and shares triggered renewed concern over the health of China’s property sector and threatens an already precarious rebound in the nation’s high-yield notes.
Rising anxiety over Shimao’s ability to service its debt prompted the dramatic selloff on Monday, which spread to other firms. Trading was halted in six of the company’s yuan bonds after they tumbled, with one falling more than 50%. Declines continued on Tuesday.
Coming less than a week after China Evergrande Group and Kaisa Group Holdings Ltd. were officially labeled defaulters, the worries over Shimao stand out partly because it was once considered a stronger borrower among property firms. With better access to funding, such builders have been more protected from the liquidity crisis that has rippled through the sector, sparked by a government crackdown on excessive borrowing by developers and speculation in the housing market.

Shares of Shimao Group and its services unit have been cut to underweight over “heightened concerns on liquidity,” by JPMorgan, citing concern property managers are being used as financial tools by developers such as by Shimao and Sunac China Holdings. That’s after a Shimao Group unit announced the sale of its property management assets to Shimao Services on Monday—a move JPMorgan said implied tight liquidity for Shimao and was a “corporate governance red flag."

What’s the company?

Shimao Group Holdings is China’s 13th biggest developer by contracted sales and among the largest property debt issuers in China, with about $10.1 billion in outstanding local and offshore bonds. It develops residential, hotel, office and commercial properties, according to its website.

Its onshore unit, Shanghai Shimao Co, reported 99.2 billion yuan ($15.6 billion) in total liabilities as of the end of September, according to its financial results for the third quarter. Total assets reached 153.1 billion yuan.

The firm had passed all of the so-called three red lines—metrics introduced to curb borrowing among developers—according to Bloomberg-compiled data including first-half results. That would typically suggest a more robust financial position that may mean it has easier access to debt markets despite soaring borrowing costs.

What’s happening?

The company said it’s looking into market rumors, which it blamed for causing Monday’s selloff, according to an emailed statement.

Credit assessors have repeatedly slashed their views on Shimao, pushing the borrower into so-called fallen angel territory. Liquidity risk concerns have persisted, even after a recent share placement and the firm’s pledge of its Shanghai headquarters for financing.

Such worries have driven wild swings in the firm’s offshore bonds in recent months. Now its onshore notes continue to price in even greater risk: a local note sold by its onshore unit due 2022 is priced at about 42 yuan Tuesday, while an offshore bond also due in 2022 is at about 76 cents on the dollar.

Shimao’s billioniare founder Hui Wing-Mau’s personal fortune has tumbled by nearly half to $4.9 billion this year as shares in the firm plummeted 71%, as of Monday’s close.

Why does it matter?

The potential collapse of a higher-rated firm like Shimao, which as of Monday still held both investment and better speculative-grade ratings, would unravel the tentative recovery among Chinese dollar junk bonds.

The declines broke the buoyant mood that dominated trading last week, when Beijing’s shift toward pro-growth policies helped drive yields on Chinese junk dollar bonds down the most in seven years. Optimism over further easing steps had helped counter the long-anticipated defaults by Evergrande and Kaisa.

What do rating agencies say?

Shimao’s long-term rating was downgraded to BB+ from investment-grade with a negative outlook last month by S&P Global Ratings, which cited weaker-than-expected contracted sales. “This will hinder the company’s deleveraging prospects,” S&P said. “The margin for error is eroding given Shimao has a very tight headroom to begin with.”

The company already has a junk Ba1 long-term rating from Moody’s Investors Service. It still has an investment-grade rank of BBB- at Fitch Ratings.

What are traders watching for next?

The next test is whether the developer can honor upcoming debt obligations including trust payments. Shimao and its subsidiaries need to refinance or repay $2.5 billion in bond maturities through 2022. That includes a 30 million yuan repayment on a 4.5% local bond due Dec. 17 and a 2 billion yuan note due January, according to data compiled by Bloomberg.

The company did not immediately respond to a Bloomberg request for further comment.

 

[rasputin]

Not sure why so many assume Evergrande is a bank. It's a real estate company.

It's not another Lehman moment. There isn't remotely the amount of contagion that existed when Lehman failed.

The Lehman comparison prompted me to revisit the Lehman thread on here that ran from August to September 2008, and it's startling to see the amount of false information flying around at the time - starting with the reports that 5,000 Lehman UK staff lost their jobs on the day the bank failed. There were in fact no redundancies at all that day.

Does anyone know if the poster who promised to stand naked in Broadgate for an entire Friday afternoon if Lehman failed made good on his/her promise?