Stealing Ordinary People's Money - Evergrande Update

Image by 3D Animation Production Company from Pixabay

There has been a lot of noise in the last few days about Canada's government freezing bank accounts and leaning on businesses who collect donations to freeze, refund, or even confiscate and reallocate donated funds.

But that is just the tip of the iceberg. Governments and banks around the world appear determined to expropriate private citizens' funds in all kinds of ways.

I'm going to touch on just one of them here, because I feel it is the one which could have the greatest ramifications. The Chinese government are moving to change the rules to allow property developers to access funds held in escrow accounts.

What Should Have Happened

This may sound arcane, but it is highly significant. The theory is that buyers of apartments in new developments would put a deposit of up to 50% in an escrow account. This would protect their funds if the build was never finished, and also protect the developer if the buyer tried to pull out of the deal.

What Actually Did Happen

However, because this is in China, the escrow accounts are not operated by independent third-party companies, they are held by local authorities. The total value held is reckoned to be around 50 billion yuan ($7.9 Bn).

The released funds are notionally being released to the developers (in particular Evergrande, who are in default and may be technically insolvent with debts estimated at $300 Bn) to give them the funds to finish part-completed developments. These can then be sold, either for cash in full or by the buyers who have paid deposits paying the rest and then being able to move in.

Where Is The Money ?

There are a number of issues with this. First is whether the buyers who have paid deposits will have the funds after so long a wait, or the willingness to pay the rest of the money in a declining property market.

But more importantly, I have a suspicion that what is really going on is a huge face-saving exercise to hide the fact that most of the money is long gone.

No-one seems to be able to say that all of the escrow funds were actually paid across to the local authorities by the developers, or what the local authorities did with the money. I have heard there was a possibility that they felt they should get a return on the capital, and did it by lending the funds back to the very same developers, who of course now don't have the funds to pay back the loans. There is also a strong likelihood that some of the money just disappeared in corruption and embezzlement.

Even if funds are released back to the developers, I can see a scenario where instead of using whatever funds remain to finish apartment blocks, the developers executives just pay themselves multi-million dollar bonuses (with appropriate kickbacks to local authority leaders) and promptly flee the country.

What Are the Likely Consequences

By doing this, the Chinese government is effectively allowing the funds to be expropriated and saying that escrow accounts are not as safe as was thought. So why would any Chinese citizen in future trust their money to an escrow account ?

Whatever happens, sadly I doubt many ordinary investors will get their completed apartments. This will cause serious harm to the domestic property market in China, possibly leading to some local civil unrest. It will also have international ramifications, with many Western banks and investment funds massively exposed to debts which won't be repaid. The values involved will at the least cause affected banks and funds cashflow problems, and at worst could cause some failures at a time when the economy is already shaky.

But on the upside, it could provide a massive boost to blockchain-based smart contracts for escrow payments. With the conditions of release or return of the funds set by code in the blockchain, they are far, far less vulnerable to embezzlement or government expropriation.