The bubble may have found its pin…
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
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.