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billvon

Evergrande crisis

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This is going to get a lot worse before it gets better.  The Evergrande group - the second largest property developer in China - has been building hundreds of billions of dollars worth of buildings over the past decade.  A very large percentage of them are completely empty.  In some places, entire small cities are empty and waiting for tenants.

Thus, Evergrande doesn't have as much money coming in, and it's now unable to pay its debts.  And this isn't something they can get a loan to cover - they have 300 billion in outstanding debt.  For a company that's worth 400 billion, that's a lot of debt.

So what now?  They can try selling off properties to larger buyers.  That's failed in the past but presumably if they go low enough someone will buy.  But if they do go low, then 1) they don't have enough to pay off the costs they incurred building them and 2) that equals instant real estate crash.

They can declare bankruptcy but of course that clobbers the Chinese economy; thousands of creditors lose their investments.

The government can try to take over.  They are trying that now - the government has taken over control of sales revenue for Evergrande's properties, and have created a state-controlled custodial account to protect home buyers from the fallout.  Worryingly, they are also trying to continue construction on all their ongoing projects,

They are pretty much the definition of a "too big to fail" company since if they fail, hundreds of thousands of people lose their (uncompleted) homes, thousand of creditors lose their investment, the real estate market tanks and the Chinese economy follows soon behind.  But there's no simple way out of this - and whatever happens is going to affect not only the Chinese economy, but the world's.

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16 hours ago, billvon said:

they have two trillion (trillion, not billion) in outstanding debt.  For a company that's worth 400 billion, that's a lot of debt.

You are switching between Yuan and USD here and not comparing apples to apples.

 

But yes an Evergrande collapse would have a devastating impact on the global economy. Many US investment houses are snapping up Evergrande bonds like candy right now.

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16 hours ago, billvon said:

This is going to get a lot worse before it gets better.  The Evergrande group - the second largest property developer in China - has been building hundreds of billions of dollars worth of buildings over the past decade.  A very large percentage of them are completely empty.  In some places, entire small cities are empty and waiting for tenants.

Thus, Evergrande doesn't have as much money coming in, and it's now unable to pay its debts.  And this isn't something they can get a loan to cover - they have two trillion (trillion, not billion) in outstanding debt.  For a company that's worth 400 billion, that's a lot of debt.

So what now?  They can try selling off properties to larger buyers.  That's failed in the past but presumably if they go low enough someone will buy.  But if they do go low, then 1) they don't have enough to pay off the costs they incurred building them and 2) that equals instant real estate crash.

They can declare bankruptcy but of course that clobbers the Chinese economy; thousands of creditors lose their investments.

The government can try to take over.  They are trying that now - the government has taken over control of sales revenue for Evergrande's properties, and have created a state-controlled custodial account to protect home buyers from the fallout.  Worryingly, they are also trying to continue construction on all their ongoing projects,

They are pretty much the definition of a "too big to fail" company since if they fail, hundreds of thousands of people lose their (uncompleted) homes, thousand of creditors lose their investment, the real estate market tanks and the Chinese economy follows soon behind.  But there's no simple way out of this - and whatever happens is going to affect not only the Chinese economy, but the world's.

Gǒu shǐ zále fēngshàn

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19 minutes ago, SkyDekker said:

You are switching between Yuan and USD here and not comparing apples to apples.

 

But yes an Evergrande collapse would have a devastating impact on the global economy. Many US investment houses are snapping up Evergrande bonds like candy right now.

What sort of yields?

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14 minutes ago, RonD1120 said:

Glenn Beck was discussing this last week. It could affect U.S. 401Ks. He stated their debt at $350B.

I don't understand how a corporation can borrow money to create something no one wants.

1. By pledging collateral.

2. By pledging to go bankrupt if they won't lend more.

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27 minutes ago, RonD1120 said:

 

I don't understand how a corporation can borrow money to create something no one wants.

Trump managed it.

 1. Trump Steaks

2. GoTrump 

3. Trump Airlines

4. Trump Vodka

5. Trump Mortgage

6. Trump: The Game

7. Trump Magazine

8. Trump University

9. Trump Ice 

10. The New Jersey Generals 

11. Tour de Trump 

12. Trump Network 

13. Trumped! 

 

And then there are Trump companies that sought bankruptcy protection:

1. Trump Taj Mahal 

2. Trump’s Castle

3. Trump Plaza Casinos

4. Trump Plaza Hotel 

5. Trump Hotels and Casinos Resorts 

6. Trump Entertainment Resorts 

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(edited)

For me this is just more evidence of the need for super rigorous governmental oversight of large corporations. Game-changing ones.

 

I know, I know. That's a dirty word, but the reality is that ANY company wants to grow to be as large and successful as possible, and if that happens there is probably a point in that company life cycle where they hit a 'too big to be allowed to fail' size. (I'm using 'size' as a shortened term for 'level of influence' which is what we're really talking about).

To cross that boundary should change the rules of the corporate / capitalist game, utterly. You don't get to keep doing the same stuff that got you to that size and influence - if you want the government to bail you out then the rules of engagement change to a super conservative risk profile. Some sort of extremely formalzed audit and risk assessment needs to be carried out with actions required to take the next step - if you've grown on a rediculous amount of borrowed capital then unless you take measures to bring the debt ratio to whatever the accepted value is, not only do you not make the 'too big to be allowed to fail' list, but your credit simply gets suspended. Deliberately crash the company to force it to fail to ta size that is sustainable BEFORE it impacts the global economy. 

That would suck for the investors (but that's the risk), and the employees, but that's a 10000x better than it sucking for people in another country who don't even know the name of the company.

 

Right now a company can use whatever shady tactics they can get away with to get as successful as possible, and if they cross that threshold (as Evergrande did) the all of the risk gets transferred somewhere else, without any process. It's fucked up.

 

 

Edited by yoink
For a million typos

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4 minutes ago, SkyDekker said:

At least he is a CFA and was a licensed security broker. :$

I found this interesting nugget yesterday by following the reference on last line of his Wikipedia page:

NYT: Ex-Employer of GameStop Trader ‘Roaring Kitty’ Fined for Lack of Oversight

Seems weird to fine his employer, instead of him.

Wikipedia: Keith Gill

 

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