Part 1 – EverGrande, The Great “Bubble” of China

The Evergrande Group, the second largest property developer in China  sells apartments mostly to upper and middle-income dwellers. In 2018, it became the most valuable real estate company in the world.

This year it has failed to make payments due on its debt, estimated in the hundreds of billions of dollars, and this has resulted in the Evergrande liquidity crisis and panic in the markets. 

Its Chinese names is 恒大集团 or Héng dà jí tuán and that means “Big Permanent Market Place Company”. Ironically it is no longer very permanent!

Evergrande has a very small share equity and a huge sea of debt. As a public stock exchange company no investor could have ignored the risky nature of their international and domestic bonds and there were plenty stories already circulating in the media in 2017 that the company had a large number of abandoned building sites empty shopping malls and empty car parks, plus plenty of unsold apartments. It was a classic example of moral hazard where banks and investors believed that the government would shore them up because it was Too Big to Fail…

But there was never a government guarantee, and American and European investors who are now being burnt are complaining about the Chinese government when they themselves should be fired for being so reckless. Naturally the Financial Times and the Economist are also criticising the Chinese government for not stepping in and allowing this payment default to shake all the markets. In fact the markets should be relieved and become buoyed by the fact that a cancerous company has been stopped in its tracks.

The bets way to deal with bad investment and bad banking is to act swiftly and decisively rather than allowing a slow and painful disease to kill off the rest of the forest.

It is a useful sign when a big investor looses a lot of money on a single stupid investment. When you see this type of behaviour remember to avoid these people in the future. According to Bloomberg the world’s largest fund manager, BlackRock, and investment banks HSBC and UBS were among the largest buyers bonds issued by Fund giant BlackRock and investment banks HSBC and UBS were among the largest buyers of the bonds issued by Evergrande. That tell you reams about risk controls at these companies.

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