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Evergrande - How $300B Turned To Dust

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Evergrande is a Chinese private conglomerate that started as a real-estate and constructions business. It is now facing a debt crisis having 300 billion USD of liabilities unable to compensate. Evergrande’s expansion was funded by borrowing and by presales of apartments in buildings that were yet to be constructed.

Evegrande was founded in 1996. It is a Chinese real estate behemoth but also expanded its scope beyond that, into financial services, electric vehicles production, internet infrastructure, operation of hotels and health businesses, and various other sectors.

The firm says it has 200,000 employees, but indirectly creates more than 3.8 million jobs every year, according to its website.

The stock price of Evergrande has crashed by 90% since its heights last year and looks like it is heading to zero. There had been thoughts about the Chinese government intervening and nationalizing the private company, but it seems that since no action has been taken yet, the most probable course of action will be a "controlled detonation".

Stock Price has Collapsed - Heading to Zero

Evergrande is already creating waves in the already weakened by Covid financial world, because of the size of the debt that will be erased. We observed this negative market sentiment in the futures markets in the US and the European Stock markets at opening today. It was a major headline in financial news in the previous days that also added to the negativity because of the increased US debt.

Its stock (EGRNF) has crashed, 90% down since the top from last year and the company can be considered already in default on its debt.

As we can see the market cap of the company is currently evaluated at $5.28 Billion, which is not even 2% of the debt this company has amassed. It has been left with zero liquidity and has no chance of restructuring its debt.

What it will be with Evergrande is a collapse of historic proportions and debt of $300 Billion that will have to be written-off. This creates additional long-term issues for the financial institutions that lent and invested in Evergrande.

This Bloomberg chart explains the wipeout of 90% of the stock price.

Protests have erupted outside Evergrande's headquarters in Shenzhen, China, from Chinese citizens that have pre-paid for housing that Evergrande was to construct at a future date.

Some economists suggest that a collapse to 300B in debt could instill a financial meltdown that will lead to a new financial crisis similar to or even worse than 2008. (CNBC).

The situation has reached a critical moment and bankruptcy of this size could create a financial shock that will affect the global economy for a long time.

The negative sentiment in the stock markets is also reflected in cryptocurrencies, dragging prices lower by ~10%.

China’s Big Plans for growth and expansion

The Chinese government has expressed optimism about economic results that will double the GDP of the country and make it the world’s first economy. An event that may happen in a period between 10-20 years from now.

The strategy is clear, having a centralized state-controlled economy, that also leaves significant territory for private investment. The economic model is not solid communist but mixed, although with high intervention standards and restrictions.

Currently, most of the production is not state-owned, since the experimentation of capitalism has allowed the Chinese economy to grow in various sectors that were previously not considered strategic.

The Chinese economy, though, is not a free market. Business is under strict regulation and scrutiny. Often, even the CEOs of top companies like Alibaba are interrogated by the authorities and may even not appear in public view for a long period. It is a completely different economic model from both capitalist and Socialist/Communist states.

In Conclusion

There are often voices that express negative sentiment, especially right after the 2008 economic crash. A few investors and economists had foreseen such catastrophic events, and they became famous for betting against the euphoria of those days.

However, there have also been far too many analysts that were expressing similar concerns throughout the last decade and completely failed with their predictions.

There can be signs of economic malfunction, but there is also difficulty in predicting the extent of events. The economic cycles are sometimes violent (both to the upside and downside) and the one factor that is of utmost importance is the interest rates.

Usually, the complications begin when sudden liquidity issues appear and Central Banks are basing their response on increased money printing that lowers interest rates. However, this only alleviates the real problem and doesn’t fix it. On a macro scale, it passes the weight of economic recovery from the failed business to the taxpayers.

Originally published at Read.Cash

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