Evergrande is the second largest real estate development
company in China and is sinking under a mountain of debt. When the company
reported last week that it wouldn’t be able to make its interest payments this
month on its $85.3 billion bonds and loans, all hell broke loose in the stock
market across the globe. Evergrande’s economic troubles may turn out to play a
very significant role in our own economic downturn.
The stock market plummeted but then everything seemed to
calm down. Why the plummet and then the immediate calming over one property
development company in China that nobody, or practically nobody, has heard of
in the western world? However, as it turns out, it seems that quite a lot of
westerners, especially economic elites, have heavily invested in Evergrande.
They could lose massive amounts of money if Evergrande goes bankrupt.
The Chinese people who had prepaid Evergrande for promised to-be-build
apartments were also massively upset that Evergrande has skipped this month’s
interest payment on their $305 billion debt, with no notification of next
steps. These people had begun sit-ins at banks, demanding their money back, and
some threatening suicide. What is the government of China to do? Bail out the
entire enterprise of Evergrande? But there are other housing developers that
are more or less in the same boat.
The western financial world is white knuckling it while
waiting for news from China about the fate of Evergrande. They are fearful of
their investments. But why have the Chinese people calmed down? A couple of
days ago they were willing to breach protocols against protests and even publicly
threaten suicide. Today are to work, minding their business and the country’s
business. Why this about face?
Let me explain. The Chinese government works primarily with
two major currencies, the yuan and the American dollar. In China people
themselves work almost exclusively with the yuan. The Chinese people have
little investment opportunities in China so most of their wealth building
opportunities are in real estate and consist of buying their homes, apartments,
and other properties and are, of course, transacted in the yuan. The debt that
Chinese people carry is called in-shore debt. When the company that took their
money for the promise of a home it now can’t meet, it took on in-shore debt.
On the other hand, the investments that foreigners have made
into Evergrande is in American dollars and is called off-shore debt. It is beginning
to look like the Chinese government may choose limited repayment, only bailing
out the in-shore debt but not off-shore debt to ensure the delivery of housing projects.
Unlike the western world, this choice is being made to bail out the Chinese
people instead of foreign conglomerates and sickening wealthy millionaires. How
It appears that Chinese people will get their money back for
the apartments they have already paid for. I believe they have been assured of
this because the yuan-denominated interest on the bonds have been quietly paid.
This means that the in-shore interest on the bonds has been paid. But what about the out-shore interest that is
denominated in American dollars? As for now, they don’t seem to be high on the
Chinese Communist Party’s list of priorities, even as international investors
face what has been described as an “eerie silence” by the company as it missed
its $83.5m interest payment.
Evergrande owes money not only to Chinese investors and
banks – it also owes massive amounts to foreign investors and hedge funds. We
can only hope that western funds supporting pension plans are not involved in
this. We do know that either way, the next steps are going to be a very big
deal indeed. More next time.