# Evergrande Default



## Purple (9 Dec 2021)

Is the news that Chinese property developer Evergrande, the most indebted company in the world, has defaulted in a payment and is now rated as 'In Default' by Fitch the first sign of the end of the current global growth cycle?
The own $300 billion and while the biggest player in the Chinese property market they are by no means the only one.


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## silverfox239 (9 Dec 2021)

I think the FT sum it up best, 


Beijing seeks to orchestrate slow-motion collapse for Evergrande


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## Sunny (9 Dec 2021)

This will be interesting....


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## Purple (9 Dec 2021)

silverfox239 said:


> I think the FT sum it up best,
> 
> 
> Beijing seeks to orchestrate slow-motion collapse for Evergrande


That's behind a pay wall so us plebs can't read it.


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## Pinoy adventure (9 Dec 2021)

I’ve being following there problems over the last few months.they are not the only property developer in distress either.


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## DublinHead54 (9 Dec 2021)

This is the latest in the Evergrande saga and in the short term will impact global financial markets like it did a few months back. A lot of people own Evergrande Debt, I guess it was similar to owning Irish Bank Stocks pre crisis. 

Not sure on the long term impacts of global growth, but it will certainly have an impact on financial markets and the local chinese property market.


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## Purple (9 Dec 2021)

Dublinbay12 said:


> This is the latest in the Evergrande saga and in the short term will impact global financial markets like it did a few months back. A lot of people own Evergrande Debt, I guess it was similar to owning Irish Bank Stocks pre crisis.
> 
> Not sure on the long term impacts of global growth, but it will certainly have an impact on financial markets and the local chinese property market.


Yea, but the Chinese property market is worth over $50 trillion. There'll be a big wave if that falls off the cliff.

In Ireland between 1 and 1.5% of properties change hands each year and supply and demand changes within that small band can shift the value of the entire stock.
If the Chinese market is similar then $750 billion worth of property changes hands each year so the impact of a $300 billion in debt default could have a profound impact on Chinese property prices and all of the investments they underpin... I could be completely wrong, but I have the same feeling about this that I did about the US market in 2008 and how it would impact on us and I sold my rentals in September of that year.


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## Sunny (9 Dec 2021)

The size of this default is the difference though. The question is if they can contain it as a techincal defaul or if the company is actually defaulting and triggering cross default clauses in bonds. I have heard some rubbish about how this won't lead to contagion because they own land and not financial assets like banks during the financial crisis. It's crazy stuff. There are funds and banks out there with huge exposure never mind if this causes problems for the Chineese economy and the global imapct.

There is no chance that a company can default on $19 billion of international debt and there not be consequences. And that's igoring that a default by Evergrande will probably lead to a default for Kaisa in Hong Kong and that is another $12 billion. China have said they can contain it. I have heard that before.


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## Purple (9 Dec 2021)

Sunny said:


> The size of this default is the difference though. The question is if they can contain it as a techincal defaul or if the company is actually defaulting and triggering cross default clauses in bonds. I have heard some rubbish about how this won't lead to contagion because they own land and not financial assets like banks during the financial crisis. It's crazy stuff. There are funds and banks out there with huge exposure never mind if this causes problems for the Chineese economy and the global imapct.
> 
> There is no chance that a company can default on $19 billion of international debt and there not be consequences. And that's igoring that a default by Evergrande will probably lead to a default for Kaisa in Hong Kong and that is another $12 billion. China have said they can contain it. I have heard that before.


Another soft landing?


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## DublinHead54 (9 Dec 2021)

Purple said:


> Yea, but the Chinese property market is worth over $50 trillion. There'll be a big wave if that falls off the cliff.
> 
> In Ireland between 1 and 1.5% of properties change hands each year and supply and demand changes within that small band can shift the value of the entire stock.
> If the Chinese market is similar then $750 billion worth of property changes hands each year so the impact of a $300 billion in debt default could have a profound impact on Chinese property prices and all of the investments they underpin... I could be completely wrong, but I have the same feeling about this that I did about the US market in 2008 and how it would impact on us and I sold my rentals in September of that year.



I don't think you are completely wrong, there will be an impact, some of which has already happened when uncertainty first appeared a few months back, but I don't think it will be as big of a domino effect as in 2008 resulting in Irish property prices collapsing. 

My view is Evergrande is a developer with a lot of debt, that debt has been bought by Financial Institutions, Asset managers, these institutions are far better capitalized to withstand losses of a default than in 2008. Each year Banks are have to stress test their exposures and one example is they select their largest counterparty and default it with a 20% recovery and have to hold capital to withstand that loss. For example Bank X owns 1bln of Evergrande debt, they'd have to hold capital to cover an 800m loss of that position. In addition risk management practices are far stronger now that there are limits on large exposures and also Chinese property has been known for a while to be a risky asset class, so lending and trading in that asset class is monitored closely.

Of course the default will increase volatility of markets, but the market has already shown its recovery from this when news first emerged a few months back.


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## DublinHead54 (9 Dec 2021)

Sunny said:


> The size of this default is the difference though. The question is if they can contain it as a techincal defaul or if the company is actually defaulting and triggering cross default clauses in bonds. I have heard some rubbish about how this won't lead to contagion because they own land and not financial assets like banks during the financial crisis. It's crazy stuff. There are funds and banks out there with huge exposure never mind if this causes problems for the Chineese economy and the global imapct.
> 
> There is no chance that a company can default on $19 billion of international debt and there not be consequences. And that's igoring that a default by Evergrande will probably lead to a default for Kaisa in Hong Kong and that is another $12 billion. China have said they can contain it. I have heard that before.



They have missed a $260m payment deadline which equates to a technical default, its not quite at the stage of a default on the full amount. 

The bonds have been trading in the distressed / high yield bucket for sometime now, which requires larger capital requirements and tighter limits. So I expect there has been active derisking of these assets from the balance sheets of FIs. 

I would highly doubt that the default of the debt would have a serious systemic impact to banks similar to 2008. Yes banks may lose money, but it is money they have set aside to withstand this kind of default.


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## Purple (9 Dec 2021)

I don't think anyone is expecting a 2008 type bust. In my opinion that was a credit bubble that has been growing and a slower and faster rate since the late 1950's. Structures are better now, but there's way more debt around now and very little carrying capacity left.


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## Sunny (9 Dec 2021)

Dublinbay12 said:


> They have missed a $260m payment deadline which equates to a technical default, its not quite at the stage of a default on the full amount.
> 
> The bonds have been trading in the distressed / high yield bucket for sometime now, which requires larger capital requirements and tighter limits. So I expect there has been active derisking of these assets from the balance sheets of FIs.
> 
> I would highly doubt that the default of the debt would have a serious systemic impact to banks similar to 2008. Yes banks may lose money, but it is money they have set aside to withstand this kind of default.



The question is if the missed interest payments will trigger a cross default or restrucring event. If ISDA decides it is an event of default, you will have Credit Default Swaps triggering and bonds with cross clause clauses will become payable.

Nobody is talking about the collapse of banks but the idea that a property company with $300 billion worth of liabilities without huge economic reprecussions for China/Asia and the World is fanciful. There is a reason why China is trying to contain it. China is pouring liquidity into their banks because of property market issues. There is a huge amount of individual retail money tied up in the company through property paid for but will never be built and retail investment. Never mind the $19 billion of international bonds. I heard one fund alone has $500m invested.

Evergrande were allowed run up $300 billion of liabilities because people thought it was too big to fail and that China would protect it. Heard that before. I have heard that have significant property assets worth a lot of money. Heard that before. I have heard it is just a liquidity issue. Heard that before. I heard that it can be contained. I heard that before.


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## Purple (9 Dec 2021)

Debt to GDP in rich countries in the mid 70's was around 130%. 
In 2012 is was around 270%
It's going to be well over 300% by the end of next year.
I'm picturing the fat man in The Meaning of Life and Evergrande is the "waffer thin mint".


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## DublinHead54 (9 Dec 2021)

Sunny said:


> The question is if the missed interest payments will trigger a cross default or restrucring event. If ISDA decides it is an event of default, you will have Credit Default Swaps triggering and bonds with cross clause clauses will become payable.
> 
> Nobody is talking about the collapse of banks but the idea that a property company with $300 billion worth of liabilities without huge economic reprecussions for China/Asia and the World is fanciful. There is a reason why China is trying to contain it. China is pouring liquidity into their banks because of property market issues. There is a huge amount of individual retail money tied up in the company through property paid for but will never be built and retail investment. Never mind the $19 billion of international bonds. I heard one fund alone has $500m invested.
> 
> Evergrande were allowed run up $300 billion of liabilities because people thought it was too big to fail and that China would protect it. Heard that before. I have heard that have significant property assets worth a lot of money. Heard that before. I have heard it is just a liquidity issue. Heard that before. I heard that it can be contained. I heard that before.



I don't think it is fanciful for the reasons I posted. Whilst $19 billion is a lot in isolation, in the context of the global bond market of $130 trillion, it is not. Credit Suisse lost $5.5bln earlier this year on the back of a default and are still a going concern, infact the total losses across banks was in excess of $10bln. On that basis, I don't see there being a huge global economic impact if Evergrande defaults because the losses can be absorbed by those who have bought the debt internationally.

The CDS are a hedging tool though so it can negate some of the losses suffered by a default, and they missed a payment 3 months ago.

I understand that $19bln is a huge amount, and it seems that crazy to think losing that amount of money wouldn't cause an issue, but thats just how big the financial markets are these days.

Of course if this leads to a property price crash in China there will be other impacts, but I don't see it on the same scale as 2008.


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## Purple (9 Dec 2021)

Dublinbay12 said:


> Of course if this leads to a property price crash in China there will be other impacts, but I don't see it on the same scale as 2008.


I think the concern is that the Chinese haven't been completely honest about the issue because, well, the Chinese are never completely honest about anything.


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## DublinHead54 (9 Dec 2021)

Purple said:


> I think the concern is that the Chinese haven't been completely honest about the issue because, well, the Chinese are never completely honest about anything.



The FT has documented the Evergrande saga well since September, so although it is hitting mainstream media today, it has been out there in the more niche media markets. Chinese markets are trading at a discount because of this and ultimately if they default on everything the exposure outside of china is 20bln or so which I believe can be absorbed. 

I think that comment is stereotyping and entire nation / culture.


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## Purple (10 Dec 2021)

Dublinbay12 said:


> The FT has documented the Evergrande saga well since September, so although it is hitting mainstream media today, it has been out there in the more niche media markets. Chinese markets are trading at a discount because of this and ultimately if they default on everything the exposure outside of china is 20bln or so which I believe can be absorbed.


Yes, there's been plenty of coverage on Evergrande on Bloomberg and elsewhere.


Dublinbay12 said:


> I think that comment is stereotyping and entire nation / culture.


I think it's more a reflection of authoritarian police states in particular rather than Chinese people in general.


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## Baby boomer (10 Dec 2021)

Purple said:


> I think the concern is that the Chinese haven't been completely honest about the issue because, well, the Chinese are never completely honest about anything.


Far be it from me to champion political correctness, but it might be more accurate to say that the Chinese *Government* (aka The Chinese Communist Party) are never honest about anything.  

That way you won't get accused of stereotyping!


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## Purple (10 Dec 2021)

Baby boomer said:


> Far be it from me to champion political correctness, but it might be more accurate to say that the Chinese *Government* (aka The Chinese Communist Party) are never honest about anything.
> 
> That way you won't get accused of stereotyping!


Good point, but maybe it was implied in the context of this thread since it is the Chinese Government rather than the Chinese people as a cohort who gather, process and release the data in question.
When I hear RTE say that "Government have said X or Y" I take it that they are actually referring to *the* Government rather than the concept that is "Government" (Although the omission of the 'the' annoys me, which further strengthens your point).

When we hear that the Americans and the Russians are having a Summit I think we all assume that all 330 million Americans (we also assume that 'America' refers to the USA) and 144 million Russians aren't rocking up to a Villa in Switzerland and it's actually representatives of the Governments of both Nations.


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## bankrupt (12 Dec 2021)

I find this Youtuber good on Evergrande and the potential effects on the global economy:  https://www.youtube.com/watch?v=rQ0t964s-8Q

It's definitely not just EG that is in trouble, there are a large number of distressed developers that are also looking likely to default in the same way (2nd highest debtor Kaisa has already defaulted).  Local government has been relying on land sales to fund themselves for years and that has now suddenly dried up.  Chinese people cannot easily invest in other assets so have been buying property like crazy (some of the stats are amazing, for example in 2018 > %80 of new dwellings were sold to people who already had at least 1).  $10Tn in household debt in China in 2021.  Then you have a demographic time-bomb and the phenomenon of "Tofu Dreg" construction to add to the mix.  The use of VIEs for offshore bonds (and share listing) means that the USD debt is effectively unsecured and could be lost completely if things go completely pear-shaped.  Not to mention the fact that the real numbers are probably significantly worse than what gets reported.

And yet, when EG and Kaisa announce defaults the S&P hits an ATH - it's hard to imagine that there could be no effect but still it does not seem to phase markets outside.


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