3 ms·

could someone explain in a few sentences why it takes so long for Evergrande to collapse?

deutschew 5y ago
A large source of CCP elite's wealth comes from Evergrande, Sunac, Country Garden. A large chunk of Chinese savings is tied to it. If they allowed people to sell or liquidate their shares, it would cause real instability.
voisin 5y ago
Too big to fail combined with an autocratic government ostensibly built upon stability. Who dares push it into bankruptcy and risk the certain wrath of that government?
- paganel 5y ago
  To be fair the same happened to Freddie Mae and Fannie Mac, which were bailed out at the start of the 2008 financial crisis. Eventually they repaid their bail-out money and then some, but back then (2008-2009) that was not seen as a possibility. At a more general level, I'd say it's very tough to let companies like Evergrande/Freddie Mae&Fannie Mac go down the drain because you risk the whole system going down, no matter if you're a de facto autocracy (like China) or a not so perfect democracy, like the US.
  - yakak 5y ago
    If these companies have been accurately summarized in the media, I would consider these very different. The mortgage companies were holding loans on a lot of individual houses, etc with concrete utility that were in actual use, where replacement stock was unavailable. In Evergrande's case they seem to have giant projects that are earmarked as investment speculation as opposed to intended primary dwellings or immediately rentable. It is entirely possible that whole districts of buildings are never of enough utility to draw residents at any price above maintenance. A company can go broke with either mistake but if a government knows the need for the collateral mortgaged actually exists then bounds from the macroeconomic situation apply so their shoveling of money will have an end.
dirtyid 5y ago
Evergrande (real estate in general) is undergoing intentional, controlled unwinding initiated by CCP kicked off by "three red lines". It was never going to collapse, the entire point of Evergrande was to avoid an Lehman moment by preempting it.
- spywaregorilla 5y ago
  That was the intention, yes. It remains to be seen if it can be pulled off.
jbay808 5y ago
They're carefully trying to change ownership of the hot potatoes so that as many of them are in foreign hands as possible. If Evergrande defaults, foreign bondholders will claim their collateral. So instead, for example, they have state-owned companies buying up Evergrande's assets, then Evergrande using that money to pay back local creditors, so that Evergrande is eventually left owning neither money nor assets to pay back foreign bondholders. Nothing left to seize in court. Meanwhile, they are trying not to create a shock in real-estate prices that would undermine the other overleveraged developers, such as would occur if Evergrande unloaded all of their assets at once. Each developer is balancing their debt-to-asset ratio, so if their real estate assets drop in paper value, they end up in Evergrande's position. Foreign bondholders appear to be playing along with this, which is fascinating; it suggests that either those bondholders are, too, looking to offload their hot potatoes and want to preserve the appearance that they're still worth something as they search for buyers, or else they're using those bonds as collateral for their own loans. As long as credit rating agencies play along and don't drop the credit rating to full default, they may be able to do so.

A large source of CCP elite's wealth comes from Evergrande, Sunac, Country Garden. A large chunk of Chinese savings is tied to it. If they allowed people to sell or liquidate their shares, it would cause real instability.

voisin 5y ago

Too big to fail combined with an autocratic government ostensibly built upon stability. Who dares push it into bankruptcy and risk the certain wrath of that government?

paganel 5y ago
To be fair the same happened to Freddie Mae and Fannie Mac, which were bailed out at the start of the 2008 financial crisis. Eventually they repaid their bail-out money and then some, but back then (2008-2009) that was not seen as a possibility. At a more general level, I'd say it's very tough to let companies like Evergrande/Freddie Mae&Fannie Mac go down the drain because you risk the whole system going down, no matter if you're a de facto autocracy (like China) or a not so perfect democracy, like the US.
- yakak 5y ago
  If these companies have been accurately summarized in the media, I would consider these very different. The mortgage companies were holding loans on a lot of individual houses, etc with concrete utility that were in actual use, where replacement stock was unavailable. In Evergrande's case they seem to have giant projects that are earmarked as investment speculation as opposed to intended primary dwellings or immediately rentable. It is entirely possible that whole districts of buildings are never of enough utility to draw residents at any price above maintenance. A company can go broke with either mistake but if a government knows the need for the collateral mortgaged actually exists then bounds from the macroeconomic situation apply so their shoveling of money will have an end.

dirtyid 5y ago

Evergrande (real estate in general) is undergoing intentional, controlled unwinding initiated by CCP kicked off by "three red lines". It was never going to collapse, the entire point of Evergrande was to avoid an Lehman moment by preempting it.

spywaregorilla 5y ago
That was the intention, yes. It remains to be seen if it can be pulled off.

jbay808 5y ago

They're carefully trying to change ownership of the hot potatoes so that as many of them are in foreign hands as possible. If Evergrande defaults, foreign bondholders will claim their collateral. So instead, for example, they have state-owned companies buying up Evergrande's assets, then Evergrande using that money to pay back local creditors, so that Evergrande is eventually left owning neither money nor assets to pay back foreign bondholders. Nothing left to seize in court. Meanwhile, they are trying not to create a shock in real-estate prices that would undermine the other overleveraged developers, such as would occur if Evergrande unloaded all of their assets at once. Each developer is balancing their debt-to-asset ratio, so if their real estate assets drop in paper value, they end up in Evergrande's position. Foreign bondholders appear to be playing along with this, which is fascinating; it suggests that either those bondholders are, too, looking to offload their hot potatoes and want to preserve the appearance that they're still worth something as they search for buyers, or else they're using those bonds as collateral for their own loans. As long as credit rating agencies play along and don't drop the credit rating to full default, they may be able to do so.