Post the Russian invasion of Ukraine, the global universe of online COVID experts have now turned their attention to the ramifications of an “utterly changed world order.” One popular mental meme is that the hegemony of the US dollar reserve position will be at risk to some new alliance anchored by the Chinese and their currency. To paraphrase Churchill or those who hike regularly in the Tetons, it’s not that “we” aren’t a disastrous mess or slow. We just have to be better or faster than the “the other guy.” The clip from Grant’s Almost Daily below is reason #9 why the world might not be so eager to dump the transparent mess of the dollar for this dark room.
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Bondholders in besieged mega-developer China Evergrande received a nasty surprise yesterday: Unnamed banks seized some $2.1 billion in deposits stored in majority-owned subsidiary Evergrande Property Services (a sum representing nearly all its cash holdings as of June 30) as those monies were used as collateral for loan guarantees to mysterious third parties. Evergrande announced it will establish an independent committee to investigate, though it warned that other subsidiaries may have made similar loan guarantees. Shares in Evergrande, which defaulted on its offshore bonds in December, have been halted on the Hong Kong Stock Exchange for the last two days, along with those of its subsidiaries.
Jilted creditors, including a trio of prominent western investment funds, have reportedly instructed their lawyers to commence legal action against Evergrande, which is working hard to fulfill a June 2017 Grant’s prophecy that the “company name will one day become proverbial, like ‘Bank of United States’ or ‘Hindenburg.’” “I think it has massively changed the game,” one investor involved with the snafu told the Financial Times. “The atmosphere in the [creditors meeting] room is one of boiling blood.”
Needless to say, that cash-poaching plot twist augurs no good things in regard to China’s debt-saturated property developers, as the presence of obscure, off-balance sheet borrowings further muddies the waters:
Broader implications for China’s capital markets also loom, Peking University finance professor Michael Pettis argued on Twitter this morning:
A well-functioning insolvency process reduces financial distress costs for the economy by, among other things, ensuring creditors are treated fairly. But if creditors with insider access are allowed to seize assets ahead of other creditors, the process can become chaotic. Rather than an orderly restructuring designed to maximize enterprise value and limit the damage to the underlying economy, this would encourage a disorderly restructuring in which agents tear apart the company as they try to maximize the share they retain of the carcass.
As political considerations evidently reign supreme in the Middle Kingdom, this week’s revelations color a March 7 Bloomberg report that the Chinese Communist Party had disinvited Evergrande founder Hui Ka Yan from its annual People’s Political Consultative Conference, a major shift as the executive had previously enjoyed party insider status.
Meanwhile, conditions in the crucial property sector (the source of 30% of China’s economic output) continue to deteriorate. On Monday evening, peers Sunac China Holdings and Shimao Group Holdings each disclosed that they will be unable to complete their annual reports by March 31, leaving shares vulnerable to being halted by the Hong Kong Stock Exchange. Overall, a quintet of Hong Kong-listed developers has indicated that they will be unable to file their audited 2021 results by the exchange’s March 31 deadline, raising concerns over “weak corporate governance, financial management and planning, as well as transparency and information disclosures,” Moody’s analysts wrote today.
The operating environment looks increasingly unforgiving, as sales among the largest 100 developers averaged RMB 524 billion ($84 billion) over the first two months of the year per government data, a 43% year-over-year decline following a 38% annual dip in December. Analysts at Bloomberg predict that the pace of decline will persist through mid-2022.
That loss of momentum is ominous not just for the property firms, considering the ample leverage that resides within the system. Citing data from Midland Realty, The South China Morning Post reports today that as many as 20% of property owners in Hong Kong’s affluent Mid-Levels neighborhood have slashed asking prices on their homes, owing to an “urgent need of funds.”
