Well this is going to be a hot take but I have been following the Asian markets very closely. The company we’re going to focus on today is Evergrande. What is Evergrande? They are China’s second largest developer and have reached the point where they are over leveraged. (Much like what happened to Lehman Brothers on Wall Street during the 2008 recession)
Evergrande is in such a bad position that they actually have no money to repay over $300 BILLION USD to their investors. So what they are planning on doing is repaying investors with unfinished real estate developments. This is problematic for a bunch of different reasons because China is already the most expensive real estate in the world and flooding the market with new housing will likely burst that bubble. The CCP doesn’t want to bail them out and do something that would be seen by its citizens as capitalism nor do they want them to fail and cause a crash. They area really in a double sword situation and to make matters worse, the timing of these revelations couldn’t have come at a weirder time. Here’s some of the checkpoints I found that might be a perfect recipe for disaster:
- Chinese (mainland) markets just opened today after being closed the past few days
- Evergrande has 11% market share of all high-yield Asian bonds
- Hong Kong and South Korea are on a holiday today and the central banks are closed Wednesday
- Over 100 investors showed up at Evergrande’s HQ to demand to know where their money was
- Offshore bonds are much more than onshore bonds and they are planning to default on offshore first
The biggest question is this: will a China collapse effect the United States economy? The answer is a maybe. It could lead to a sell-off which is to be expected anytime now since our inflation rate is at 5.3%. Last time we saw rates that high were during the 2008 crash and the numbers are all aligning correctly again. Another catalyst in this discussion is the forbearance dates are coming soon and foreclosures will be back in most States. I will write about this again in a few days to see if there’s any developments.