Central Bank Digital Currency: Central Banking For All
09/16/21
Timothy Reaume Joins Blue Chip Partners as a Senior Financial Advisor
09/27/21
China Evergrande Group
China Evergrande Group is a real estate developer (EGRNF) that employs 200,000 people and sustains 3.8 million jobs in related industries – it is a meaningful institution. Evergrande has embodied the “borrow and build” philosophy seen in China to support a massive and growing workforce and population. The company has grown immensely by borrowing the equivalent of over $300 billion.
The Situation
Last year, officials in Beijing implemented new rules to control the amount owed by big real estate developers. These new measures led Evergrande to offer its properties at severe discounts to ensure money was coming in to keep what was ultimately a stretched business afloat. Even with these discounts, Evergrande has had trouble finding buyers for some of its assets. There have been some seriously shady happenings at the firm... strong-arming employees to provide the company short-term loans, and pre-selling an immense number of unfinished apartments have been commonplace. Now, the company is struggling to meet interest payments on its massive debt load.
The Global Impact
With the collapse of Evergrande looking increasingly inevitable, analysts in Asia, Europe, and the United States are warning us that we will see a severe spill-over to other financial markets. Major banks have reportedly been told that they will not receive interest payments on loans due yesterday. Additional interest payments are due Thursday. The primary concern for financial players is that an Evergrande fire sale could crush prices. This could cause leveraged developers to blow up and lead to an ensuing explosion of sectors comprising almost a quarter of China’s economy.
The situation and potential for contagion spooked investors around the globe yesterday. A default by the Chinese company could spread to other parts of the economy and world. There is mounting pressure on China’s government to prevent financial and economic contagion impacts from destabilizing the world and the second largest economy. Many are saying that the Chinese government does not have an incentive to bailout Evergrande which is a private-owned enterprise.
It appears that just about every bank in China has exposure to the company, which explains the heightened contagion fears.
The repercussions from Evergrande’s prospective collapse could contribute meaningfully to China’s ongoing economic deceleration. That would have broad ramifications for global growth, inflation, and commodity prices.
What It Means For Us
While U.S. equities were lumped into the selloff and saw a broad risk-off move, it is unlikely that any direct, lasting negative impact should be seen in the U.S. If anything, it serves as a reminder for investors that regions like the U.S. with strict corporate governance requirements should be afforded a premium.
The Chinese Communist Party has disrupted its local market by incentivizing aggressive growth and interrupting corporate governance. As seen in their recent escapades in the technology and private education sectors, they will intervene when the outcome is different than the one they tried to create.
Keep in mind that we are approaching an FOMC meeting this week. It will be heavily scrutinized for details regarding a potential taper, which would have been enough to occupy investors even without the situation in China.
This is a fluid situation and will be in the spotlight for the next few days. The bottom line is this could be a week of uncertainty in the markets.
Expressions of opinion are as of this date and are subject to change without notice. The information provided does not constitute tax, legal, accounting, or other professional advice and is without warranty as to the accuracy or completeness of the information. Any information provided is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation to buy, hold or sell any security. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There are limitations associated with the use of any method of securities analysis. Indices are included for informational purposes only; investors cannot invest directly in any index. Every investor's situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Past performance does not guarantee future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that any statements, opinions or forecasts provided herein will prove to be correct.
