Evergrande: China's Black Swan Event Threatens to Crash China's Banks & Spread to Global Economy

Evergrande: China’s Black Swan Event Threatens to Crash China’s Banks & Spread to Global Economy

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.

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.

Once things begin to fall apart, it quickly spreads and reveals the holes in the entire façade.

As you can see, the cascading effect really began months ago. Now things are simply coming to a head.

Indeed the Last Bear Standing was correct and now we can see that it would have been prudent to pay attention months ago.

I highly recommend everyone look at the master thread above which links to several other threads breaking down recent events.

Pay attention in the days and weeks to come.

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.

You can see how the contagion is spreading to all markets.

Sahil has done a short thread on the situation also.

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.

We know there have been issues with the global supply chain for a while now, thanks to the Covid lockdowns.

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.

Girolamo has a really good point here. China has flooded U.S. social media with bots and people being paid to publish disinformation.

This is absolutely true.

The graph speaks for itself here.

Indeed.

The prognosis is grim.

Contagion is an interesting term when you consider the fact that the so-called Covid-19 “pandemic” came from China also.

They might try to have the cycle simply repeat itself.

For China, this truly is a black swan event of epic proportions.

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.

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.

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