Disclaimer: The following article is not financial advice. Please do your own due diligence and speak to an investor about your personal financial situation.
September 20, 2021 – One company, Evergrande, is threatening to take down the entire Chinese financial system. Investors and market commentators have been speculating on what China might do to prevent a systemic collapse. Due to the interconnected nature of the global market, failing Chinese stock prices will affect U.S. stock prices and U.S. Treasury yields.
Many financial commentators have referred to the Evergrande implosion as a “black swan” event. This is interesting because just two weeks ago a black swan was seen in Tiananmen and Beijing police dispersed crowds from viewing the swan. Black swan events are considered rare and unexpected, unpredictable beforehand, massively impactful (negatively or positively), but later appear in hindsight as more predictable than they really were. Many considered the Trump presidency to be a “black swan” event, for example.
The second largest property developer, Evergrande is a Chinese property giant. According to Bloomberg:
Hui founded Evergrande (formerly called the Hengda Group) in 1996 in the southern city of Guangzhou and expanded the real-estate developer, largely by borrowing. Evergrande Real Estate owns more than 1,300 projects in more than 280 cities, according to a company website. The group now goes far beyond homebuilding, with investments in electric vehicles (Evergrande New Energy Auto), an internet and media production unit (HengTen Networks), a theme park (Evergrande Fairyland), a soccer club (Guangzhou F.C.) and a mineral water and food company (Evergrande Spring), among others. It reported an adjusted core profit of 30.1 billion yuan ($4.7 billion) for 2020, the second annual drop in a row, and revenue missed analysts’ estimates.
China Evergrande Group is quickly becoming the biggest financial worry in a country with no shortage of them. With $300 billion in liabilities and links to myriad banks, Evergrande could send shock waves through the financial system and the broader economy should calamity strike. Its stock price has cratered and its bonds point toward potential default, yet Hui Ka Yan, the billionaire owner, has sought to reassure bankers that the property company will pull through. Investors aren’t sure how. They’re also asking whether major Chinese companies are still considered too big to fail by the central government, which prizes stability — and what happens if they’re not
The world’s most-indebted developer had a liquidity scare in 2020. Evergrande reportedly sent a letter to the provincial government of Guangdong (Guangzhou is the capital) in August, warning officials that payments due in January 2021 could cause a liquidity crisis and potentially lead to cross defaults in the broader financial sector. Reports of the plea for help emerged on Sept. 24, sending Evergrande’s stock and bonds tumbling even as the company dismissed the concerns. The letter, which was widely circulated on social media, was verified to Bloomberg at the time by people familiar with it, but Evergrande later disputed its authenticity. Crisis was averted soon after when a group of investors waived their right to force a $13 billion repayment. – Bloomberg
Evergrande has to repay around $7.4 billion of maturing bonds next year. It’s possible the state could step in to bail out the company. Beijing reportedly advised authorities in Guangdong to draft a plan to manage the firm’s debt problems. This could also lead to China’s devaluing their currency.
http://twitter.com/michaeljburry/status/1439831160306032646
Michael Burry brought up a thread published by @thelastbearsta1 on Twitter that was warning about the Evergrande situation back in June.
I am posting screenshots of the tweets in case for any reason the thread disappears.
The Last Bear Standing makes a really good point here, underscoring a larger problem with communism at its root, and state intervention in general.
Markets are designed to self-correct. Pushing the buck down the road serves only to complicate the instigating problem.
Indeed the contagion is now being signaled by outlets like Zero Hedge.
17. The canaries in the (Yunnan) coal mine have been there for years, but now things are moving in a fast escalating fashion. It finally feels this may come to a head. The ramifications globally are unknowable but there is real the risk is that this pops the global asset bubble.
— TheLastBearStanding (@TheLastBearSta1) June 1, 2021
Some investors and commentators have begun calling this “China’s Lehman Brothers.” PSB readers will recall that often I have warned about these bubbles relative to highly over-valued tech companies.
The party doesn’t stop til you run out of blow pic.twitter.com/2pDDhRZb8u
— TheLastBearStanding (@TheLastBearSta1) June 3, 2021
Once things begin to fall apart, it quickly spreads and reveals the holes in the entire façade.
While you’re talking rates and CPI, the story on Caixin is the most senior finance official in China “sounding the alarm bell” over on its financial system. No liquidity in Huarong onshore, Evergrande trading off, Cinda/Great Wall exec indicted for graft yesterday… pic.twitter.com/JGef1NLPmD
— TheLastBearStanding (@TheLastBearSta1) June 10, 2021
As you can see, the cascading effect really began months ago. Now things are simply coming to a head.
Evergrande bond flush update. If you're wondering why you should care… you will learn soon. pic.twitter.com/aQqrHUgrVM
— TheLastBearStanding (@TheLastBearSta1) July 20, 2021
Indeed the Last Bear Standing was correct and now we can see that it would have been prudent to pay attention months ago.
China Credit Thesis – Master Thread:
(since Twitter is hard to navigate)
— TheLastBearStanding (@TheLastBearSta1) September 7, 2021
I highly recommend everyone look at the master thread above which links to several other threads breaking down recent events.
Per Bank of International Settlement we now have 13 trillion of U.S.D forwards / swaps off balance sheet with non-banks. They have no clue who's holding this…
Why is this important? This fueled the 1997 Asian flu currency crisis that swept Asia. China has swap line w/Fed pic.twitter.com/q32QnB6Rdw
— TechnoDirt (@Keith80519590) September 15, 2021
Pay attention in the days and weeks to come.
And another and another…Guangzhou R&F Properties also collapsing… pic.twitter.com/9wQebzDOpa
— 🇺🇸Kyle Bass🇺🇸 (@Jkylebass) September 20, 2021
Indeed the banking crisis is already well on its way. Hong Kong has major exposure to Evergrande and will soon be facing its own issues as a result.
Evergrande already having effect in Australia. Iron Ore futures drop 6.1%
Every $US10 the price of Iron falls, nominal GDP decreases by $6.5 billion.
Media saying Chinese real estate investors may liquidate properties in Australia to stay afloat. #Evergrande #EvergrandeCrisis pic.twitter.com/CoJ6BH8B9K
— Wall Street Silver (@WallStreetSilv) September 20, 2021
You can see how the contagion is spreading to all markets.
Evergrande is the train wreck that the financial world and media can’t help but watch.
Here’s breakdown on the story: pic.twitter.com/P9ncxSFWW9
— Sahil Bloom (@SahilBloom) September 20, 2021
Sahil has done a short thread on the situation also.
#Evergrande structure. Poised for domino?
Via @zerohedge pic.twitter.com/z3p1cXCX6F
— Amit Kumar Gupta (@amitgupta0310) September 20, 2021
Zero Hedge has done a detailed graphic depicting the “domino” effect the Chinese Evergrande crisis will have.
Among the other interesting moves of note: The Federal Reserve has begun selling off all their corporate bonds. This comes on the heels of the Fed members selling off stocks. The Fed has begun inflation stimulation and tapering/tightening. In China the Hang Seng index drops nearly 4% as Evergrande shares plunge 17% and other property stocks falls. This brings it to a 52-week low. Janet Yellen has renewed calls to raise the debt limit to avoid catastrophe. Los Angeles and Long Beach ports in California are now transitioning to being open 24/7. Inflation is on the rise. Used car prices are up as Americans continue to flee cities for the suburbs.
Neon Revolt, an author and journalist who reports frequently on the markets provided comment for this article. When asked about his thoughts on the China/Evergrande situation he said “Well, Bulls last hope here is that China will somehow bail Evergrande out, but I would be surprised if that happens. Because it’s not just Evergrande in this position, it’s a lot of Chinese real estate development companies. Evergrande’s balance sheet isn’t even the worst. Others are in similar and/or worse positions. If the CCP does step in the bailout Evergrande then they have to bail out the others and I just don’t think they are prepared to go that far. It’s not just a black swan event here. It’s a flock of black swans. So I expect a LOOOOT of selling off of assets as people and funds scramble to cover their margin requirements. I expect stocks, precious metals, and the 10 year to fall dramatically. Especially PM’s as China sells off.
I’m laughing though, because I think I just read that Blackrock has billions in exposure to Evergrande. And I’m thinking that suddenly finding out that all that Chinese Paper is worthless couldn’t have happened to a better group. What many don’t realize, however is that Chinese markets were closed today. All the selling you’re seeing was from US and European markets. It was a holiday in China. Also, notice The federal reserve chiefs just divested. You’ll know we’re in a real crash when the 10 year goes, it hasn’t quiiite tipped over yet. But it had a very large move today, all things considered. The fed selling off corporate bonds and their stocks, the timing isn’t a coincidence. Plus, you’ve got the looming debt ceiling, potential tapering from the fed, that spells a lot of uncertainty. China may choose to devalue their currency but even that has its consequences like a loss of faith in Chinese markets. Then there is Chinese consumers being in debt and stopping their spending.” You can find Neon Revolt on Gab and on his website, Neonrevolt.com.
The Gab group Wall Street Bets was filled with commentary on the current situation. I contacted the group for comment and received these responses:
One user named @Houston commented on the situation and saying “F*ck China.” Other users speculated about this being “Red October.”
@NeonRevolt, posted in the group “One strategy to profit off a CHYNA collapse may be to buy some call options on $YANG. I’ll explain. Direxion has two triple-leveraged China ETFs. Yinn is the 3X Bull Fund. Yang is the 3X Bear fund. Triple leverafed ETFs rebalance every day, so you’ve got to be prepared to move at a moment’s notice, but if you’re expecting CHYNA to implode in the coming days and weeks call options on Yang may just be a good play. This is not investment advice. Do your own Research and Due Diligence.”
@jbeidle, John Beidle posted, “It seems reasonable to me that the Dow 30 and other indices could cover the gap set in November 2021.”
@Shooglenifty said “Ghost cities become ghost markets!” which is a reference to the ghost cities of China. These are development properties that are totally empty.
Another user @XRPBob commented, “Buy the dip!”
@JediPepe responded, “People are starting to take a second look at owning silver and gold as confidence in the dollar and the market as a whole begin to plummet.”
@TotallyBirdBrains noted, “A LOT of dividends are paid around September 30 & October 7, so why would a sell-off start now and not immediately after that?”
@LordEyrie stated “Fake and Gay have reached critical mass. Paper isn’t able to keep the Castle held up anymore, no matter how much they print. Hold onto your butts!”
A user named @ShoJu posted the following image:
Gold and Silver and both up right now.
What is this crisis? Supply chain related. We will know in hindsight. pic.twitter.com/eanBbfOnlt
— Amit Kumar Gupta (@amitgupta0310) September 20, 2021
We know there have been issues with the global supply chain for a while now, thanks to the Covid lockdowns.
Chinese govt banning anyone from discussing Evergrande COLLAPSE. Good luck to the westerners holding the bag of crap 💩 (US dollar bonds). You are going to get what you deserve and it rhymes with ‘hero’….”#China #BagOfCrap https://t.co/qEZVARLtQl
— 🇺🇸Kyle Bass🇺🇸 (@Jkylebass) September 16, 2021
China has totally infiltrated the West. American elites are increasingly thinking like the Chinese with their imposition of things like cancel culture and the new ministry of truth.
http://twitter.com/michaeljburry/status/1439703309997121537
This has and will continue to hurt America, and we can thank Wall Street and other elites for pumping China up in the first place.
It started a while back and has seen other defaults, including SOEs. What are the specific policy changes? Most important is the introduction of the 3 red lines a year ago:
– L/A < 70%
– net leverage < 100%
– cash to ST debt > 1
2/N— Girolamo Pandolfi da Casio ditto Carlo Dossi Erba (@INArteCarloDoss) September 17, 2021
Girolamo has a really good point here. China has flooded U.S. social media with bots and people being paid to publish disinformation.
And believe it or not, the sector was levered to the gills. The 3 red lines are hardly draconian, yet all the CCC, a large chunk of the B and a good 1/3 of the BB did not pass them a year ago. Needless to say, it was really not too early. But there is more to it than leverage
4/N— Girolamo Pandolfi da Casio ditto Carlo Dossi Erba (@INArteCarloDoss) September 17, 2021
This is absolutely true.
That model worked well for local governments, banks and households because house prices were going up. So much so over the last 15 years, that a serious affordability crisis emerged in major cities AND HH debt soared way above disposable inc – below HH debt as % GDP
6/N pic.twitter.com/b4IdFdbL1X— Girolamo Pandolfi da Casio ditto Carlo Dossi Erba (@INArteCarloDoss) September 17, 2021
The graph speaks for itself here.
As a result of years of seeking easy growth through construction and leverage, the misallocation of capital was : 1- capital starving more innovative and high tech sectors (see chart) and 2- creating a headwind for a re-balancing towards a more consumption driven growth.
8/N pic.twitter.com/knJ6Mj4rUO— Girolamo Pandolfi da Casio ditto Carlo Dossi Erba (@INArteCarloDoss) September 17, 2021
Indeed.
Tte issue of irregularities is at the core of what is happening with Evergrande. More on that later. It’s a long introduction, but it seemed important to explain these issues to understand the long term nature of this problem and why it’s resolution will be tedious.
10/N— Girolamo Pandolfi da Casio ditto Carlo Dossi Erba (@INArteCarloDoss) September 17, 2021
The prognosis is grim.
The tail risk emanating from the implementation of this new paradigm is being priced in. It’s not only Evergrande’s credit that is collapsing but the whole HY market. Contagion is AT work. China HY is some 10% away from it’s March 20 low….that’s not benign
12/N pic.twitter.com/LNoKoJkO4h— Girolamo Pandolfi da Casio ditto Carlo Dossi Erba (@INArteCarloDoss) September 17, 2021
Contagion is an interesting term when you consider the fact that the so-called Covid-19 “pandemic” came from China also.
So we established that we are in the phase of pricing the tail risk. All in all pretty China centric for now. How could it create contagion beyond. There are significant losses already for the international holders of China credit and equities. That’s one channel.
14/N— Girolamo Pandolfi da Casio ditto Carlo Dossi Erba (@INArteCarloDoss) September 17, 2021
So it will get resolved through asset sales. Idiosyncratic stories will dominate. Stronger balance sheet players will snap land and construction sites. SOEs will snap some assets. State will unwind bad players to help make whole employees and home buyers.
16/N— Girolamo Pandolfi da Casio ditto Carlo Dossi Erba (@INArteCarloDoss) September 17, 2021
They might try to have the cycle simply repeat itself.
Expect more rot to be exposed, trials, accountability, compensation, etc…Stabilizing the onshore property market will be long, arduous, and risky. Evergrande alone has an order book of 1,7 m residential units. Those are down paid for, yet unfinished.
18/N— Girolamo Pandolfi da Casio ditto Carlo Dossi Erba (@INArteCarloDoss) September 17, 2021
There’s obviously a read- cross for all commodities, but mostly steel. Dalian Iron Ore started collapsing in July and never looked back. Unsurprisingly, August showed the biggest drop in steel output on record…
20/N pic.twitter.com/GHmDaeyPrr— Girolamo Pandolfi da Casio ditto Carlo Dossi Erba (@INArteCarloDoss) September 17, 2021
For China, this truly is a black swan event of epic proportions.
It’s not only a commo issue. China’s consumers are very levered and while output has been restored to pre-COVID levels, consumers can’t keep up. Retail sales plunged recently to 11% below trend and all high frequency measures are showing sluggish spending. Chart Pictet
22/N pic.twitter.com/SKf9BAQTLU— Girolamo Pandolfi da Casio ditto Carlo Dossi Erba (@INArteCarloDoss) September 17, 2021
While some signs of funding stress are emerging like the Onshore USD/CNY 1y swap rates ticking up, it’s still largely benign. China is a financial system where state and banks are 1 and liabilities locally dominated and held.
24/N— Girolamo Pandolfi da Casio ditto Carlo Dossi Erba (@INArteCarloDoss) September 17, 2021
Girolamo says this will affect American citizens, and they will end up taking losses as well. He went on to warn that “investors need to understand that China has taken a turn towards a different economic model: Higher regulation standards, curbing non-strategic tech, redistribution of wealth, better capital allocation, de-levering, clamping on evasion/irregularities and crushing speculation.”
#evergrande in usd, market cap $4b, total debt $100b, $40b debt in usd, other payables $200b (unclear how much in usd), main asset $20b in investment properties, $200b property under development (likely 50% hair cut), est. $100b usd exposure.. not crazy.. https://t.co/xXZKUOblgZ pic.twitter.com/DT91gLR4PU
— John Lee, CFA (@johnlee25893955) September 20, 2021
A Chinese property owner implodes, and the shares of American social media and auction companies are tumbling. The chain reaction may say more about the extreme altitude of global risk assets than it does about economic contagion https://t.co/Su4FVfILm1
— Bloomberg Markets (@markets) September 20, 2021
To conclude, Evergrande is a flock of black swan events. It is a thread that will unravel the entire system. The first domino will begin a cascade of collapse. We now know that Evergrande has been insolvent for years. They are on the brink of default. Just to put it into perspective, Evergrande’s liability is larger than Pakistan’s GDP (U.S. $263 Billion as of 2020). The impending Evergrande crash is estimated to be bigger than the 2007-8 Lehman collapse and combined with other problems in the Chinese market, we are seeing similar signs that we saw right before the 2008 U.S. market crash. If they go bankrupt it will have devastating consequences for the global financial markets.

just a joke, LOL
~~Photo credit: PicassoBursatil.