Absolutely crazy that the top comment on this story is a "USD short squeeze" idea after 5 hours. These amounts, 200 million, 150 million USD.. this is peanuts, a fart in the wind.
PROTIP: Anyone like Lyn Alden that is offering premium stock tips is by definition a fraud, if you can beat the markets you just beat the markets and Scrooge McDuck-it, you don't run a damn newsletter.
That's a $150 million payment that they can't make. The concern is how are they going to make the future payments? Their total liabilities are on the order of $300 billion. Fantasia (mentioned in the story) is another China real estate developer in trouble. The concern is that this is the tip of the iceberg.
> Their total liabilities are on the order of $300 billion
~300 billion is the size of their debt (485 at the end of H1 2021). Their assets are at +2 trillion, +1 trillion in real estate alone.
Their problem is that with their current cash flow they can't pay their debt, ever, and now, they can't even keep up with the interest. But they're still in a position where selling off part of their inventory can offset the debt, and to my knowledge, that's what they've been trying to do.
That is, if their financial statements area real. That's the quid here, their position isn't particularly anomalous, but the market cap sits at 33 billion, very far from their declared assets, meaning the market doesn't believe those statements. Thats 60 to 1, where most REIT sit at around 2 to 1.
Their main problem is the large amount of unfinished homes (read: not producing any income) and you need money to fix that. My guess is that the government will step in to fix that point in particular.
You are right to ask that question. Generally, real estate is considered a low liquidity asset. I wonder how much their real estate assets are discounted during buy-side analysis.
As it seems like virtually all buying in this market comes from developers and investors hoping to sell at a higher price later, they'll probably be lucky to get a fraction of that.
All of which is unrelated to the idea of some sort of /global/ USD short squeeze, which is just a nonsense idea.
Holding debt in another nation's currency involves risks but it is also the case that bond issuers can mitigate that risk with financial tools at the time of borrowing. It is doubly true that the CNY has and still is trading within a narrow band over the life of these debts, currency risks are not a factor in this story in any way.
This ‘protip’ is quite wrong on many levels. Observe the behaviour of the most successful investors, and you will notice they write books, go on podcasts, talk about their strategies etc all the time. In fact you can’t shut them up. The world’s most successful investor, the biggest ‘Scrooge McDuck’ of them all, has completely public disclosures.
On the contrary, the worst advice comes from people who have no accountability or reputation to worry about.
Lehman Bros was, relatively speaking, also a "fart in the wind" - it all started with $2.8 billion loss (not even default). Things kinda snowballed massively from there though, over the course of a few months to the point where it was a threat to the global financial system. The fear is the same could happen in China as well.
Quote: <<July 17, 2007—In a letter sent to investors, Bear Stearns Asset Management reported that its Bear Stearns High-Grade Structured Credit Fund had lost more than 90% of its value, while the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund had lost virtually all of its investor capital. The larger Structured Credit Fund had around $1 billion, while the Enhanced Leveraged Fund, which was less than a year old, had nearly $600 million in investor capital.>>
After the incident, Bear took the bad assets onto their own balance sheet. Shortly thereafter, creditors starting asking hard questions: "What other crap is on your bloated balance sheet?"
That said, the PRC gov't might allow Evergrande to default on their offshore/external/USD debt, but provide a bailout onshore. That seems realistic. During the 2008 GFC, Deutsche had an enormous footprint in the United States (via commercial and investment banking). They got almost nothing from US Fed/Treasury during bailouts. Same for UBS. Why not? They were not American corporations.
Wouldn't that severely damage China's ability to attract foreign capital, though? I mean, they've already made their printer go brrrr to the point where Jerome Powell would blush, so it doesn't seem like they have a ton of flexibility in terms of domestic monetary policy, and therefore bailouts. And nobody outside China is stupid enough to jump on the deck of this particular Titanic. Nobody inside China is, either, but the government can make them jump on, much like US government did with US financial firms in 2008.
> Wouldn't that severely damage China's ability to attract foreign capital, though?
I kinda get the impression that they want capital for manufacturing rather than property speculation.
Given how important house prices/construction is for their economy and growth, it's gonna be really interesting to see what they do (will they accept negative GDP growth to increase "common prosperity").
That says pretty appalling things about Western capitalism in general that it is predicated on government (ie, public) backstops, protected from the market, socialism for the rich/elite, and not available to the little people. Starts to look like the worst of communism, frankly.
Lehman was allowed to go bankrupt, which in the UK forced the immediate cessation of operations (in the U.S., the firm can still operate even if its bankrupt). That was the equivalent of shifting to park on a car moving 80 miles an hour, especially as they froze their prime brokerage.
The blow up probably could have been less severe if they smoothed the landing.
That's interesting. What is the expected method to emerge from bankruptcy, or at least protect investors and creditors, if a business must cease operations?
My intuition (and the presumption in the U.S.) is that a market position allows a business to dispose of inventory in normal commercial channels more profitably than auctioning it at wholesale in a Chapter 7-style liquidation. Hence first-day motions in U.S. bankruptcy courts.
(Disclaimer: I worked on the Lehman Brothers bankruptcy but did not represent any U.S. or U.K. subsidiaries.)
That's a point worth reenforcing. The initial losses were severely compounded by nominal value locked in credit default swaps... which were insured by unbacked policies. There has to be at least one person here that understands the sizes of these derivative markets in China, right?
Not to mention, are they really doing it in good faith? Back in the GFC days, Goldman made headlines for just trading against their clients. Rather, I guess, for saying the quiet part out loud.
> Thomas Mazarakis, who heads Goldman’s fundamental strategies group, told select clients in an email that his unit often provided investment ideas that the firm had already traded on and the firm sometimes took the opposite approach, betting against particular instruments recommended by the group, the Times said.
> “We may trade, and may have existing positions, based on trading ideas before we have discussed those trading ideas with you,” the paper quoted Mazarakis as writing in the email. [1]
Would seem a good way to monetize your audience is to (a) get paid to (b) take positions and then (c) control the narrative around your positions - both publicly and to paying customers to gin the position up.
Your last sentence is perfect: pithy. This same strategy is, of course, also used by short sellers. Larger hedge funds have a PR team that works to increase media coverage of their short positions. See: Bill Ackman and Herbalife.
> PROTIP: Anyone like Lyn Alden that is offering premium stock tips is by definition a fraud, if you can beat the markets you just beat the markets and Scrooge McDuck-it, you don't run a damn newsletter.
For all I know you are right about Alden's ethics, but the EMH is not baked into the definition of fraud.
In fact, many investors do offer public trading advice: it's common among short sellers to both short their targets and publish analyses explaining why they think their target is overvalued. This is controversial, but if it is clear to receivers of the advice that the advice comes from a short-seller whose positions are known, then I do not regard it as particularly unethical.
Official or public available info on those Chinese debts are a couple hundred mils. Yes these are peanuts. But unofficial numbers are several magnitude higher even extremely likely Chinese authority unaware of (2008 showed that US government had no clue how bad it was back then which even AIG almost gone). It is basically the iceberg sinking Titanic in the remaking now on Chinese financial front. Also, when USD start to rise, regional currencies tend to slide...millions and millions middle class people will participate to buy USD as the new inflation hedger like gold (which will be underperforming during the short sequeeze situation). The only thing that will stop this is Chinese government printing money more than Barry did in his terms (basically spreading those debts indirectly pay by citizens).
> Anyone like Lyn Alden that is offering premium stock tips is by definition a fraud
I've been reading everything I could on economy and finance in my early twenties and Lyn Alden blog is the only thing I needed then and wasn't available. She is pure gold — I know no one that is able to explain complex topics in this context with such clarity.
>Anyone like Lyn Alden that is offering premium stock tips is by definition a fraud
Hmmm , depends on what these "tips" entail right? What if another website offers long term hold advice via a newsletter and charges you for it? As a matter of fact, I do subscribe to one in India (no , I am not going to publicise it. DM me if you want to know) where the holding periods are anywhere between 2yrs to 5 yrs. There are disclosures that say whether the stock analyst holds the stock/bond etc.
PROTIP: Anyone like Lyn Alden that is offering premium stock tips is by definition a fraud, if you can beat the markets you just beat the markets and Scrooge McDuck-it, you don't run a damn newsletter.