Tag Archives: Banking

Will Evergrande Spark a Global Financial Crisis?

A massive Chinese property developer is teetering on the edge of bankruptcy, roiling markets worldwide today:

Worries about spreading contagion from troubles in China’s property market sent U.S. stocks toward their steepest declines in months on Monday.

The retreat came amid concerns over property developer China Evergrande Group. Market participants increasingly believe that Beijing will let Evergrande fail and inflict losses on its shareholders and bondholders. The company’s debt burden is the biggest for any publicly traded real estate management or development company in the world.

What Is Evergrande?

Evergrande is an odd company. It is one of China’s largest property developers but also has its hands in electric cars, soccer and bottled water. It has more debt than any other real estate company on the planet.

Sales have slowed in recent years, along with China’s economy. Rather than devising a new strategy or pulling back on growth, Evergrande has continued to build at a breakneck pace, earning lower and lower margins.

It’s the old “We lose money on every one, but we make it up in volume!” mistake. And as if to make things even worse, they’ve expanded to businesses they know nothing about. What unique insights does a property developer have on the bottled water market?

Risks in China

If Evergrande goes down, who’s going down with them? Probably mostly Chinese banks, as they’re the major holder of the embattled conglomerate’s debt. JP Morgan estimates that China Minsheng Bank has the largest exposure.

China Minsheng bank is an interesting company. In a banking sector dominated by state owned banks, China Minsheng was the first bank mostly owned by the private sector.

In a moment when Xi is trying to centralize the economy and promote state owned business, he could let it fail. The state owned banks could pick up the pieces, cementing their position.

But if a massive property developer like Evergrande fails, perhaps taking some major banks along with them, the Chinese financial system could be badly shaken.

Add this to crackdowns on numerous tech companies and even seemingly random targets like celebrities, and I could see a crisis in confidence in Chinese markets.

They’re already weak:

What About the US?

I think US markets are overreacting today. The institutions with heavy exposure to Evergrande appear to be mostly Chinese, not American. Moreover, trade with China is just 6% of US exports.

In all, I could see China’s economy and markets taking a significant hit, but I think the damage will be contained.

Investors in China, good luck.

More on China:

How China’s Tech Industry Dies

China’s Real Goal in Tech Crackdown: A Regimented, Obedient Society

China’s Tech Crackdown Means Economic Decline

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A Giant Hedge Fund Is Imploding, Taking Stocks with It

Ten billion dollar hedge fund Archegos Capital Management is imploding, causing banks to frantically sell its portfolio to stem further losses:

One mystery in a dramatic year on Wall Street has been the identity of a trader whose persistent purchases have sent shares in ViacomCBS Inc., Discovery Inc. and a handful of other companies surging even when the broader market was down.

People familiar with the transactions say the answer is former Tiger Asia manager Bill Hwang. Late last week Morgan Stanley, Goldman Sachs Group Inc. and Deutsche Bank AG swiftly unloaded large blocks of shares in those companies and others, part of the liquidation of positions at Mr. Hwang’s Archegos Capital Management.

The sales approached $30 billion in value, some of the people said, and fueled a 27% plunge Friday in shares of ViacomCBS—an unusually large decline in a widely held, large-capitalization stock on a day with no significant company-specific news. Billions of market value in other companies were wiped out as the sales continued, surprising market participants who called the size and speed of these stock sales unprecedented.

Hwang had placed giant bets on several stocks funded with borrowed money, and his fund suffered major losses when the stocks moved against him:

…a major actor in supporting companies’ share prices appears to have been undone by his continuing to add to leveraged bets as markets soared. The strategy fell apart when some of those bets started to reverse on him.

There were serious warning signs about Hwang’s conduct, which his banks, including Nomura and Credit Suisse, did not heed:

U.S. securities filings show Credit Suisse was prime broker in 2011 and 2012 to Mr. Hwang’s former firm, Tiger Asia Management LLC. Tiger Asia handed money back to investors after Mr. Hwang admitted in December 2012 that the hedge fund criminally used inside information from investment banks at least three times to profit on securities trades.

This is the latest in a string of problems for Credit Suisse:

Credit Suisse is still digesting the collapse earlier this month of Greensill, a British supply-chain finance company that declared bankruptcy shortly after the Swiss bank froze funds that provided it with liquidity. The double hit could be an extraordinary run of bad luck; there were other banks caught up in both failures. Alternatively, it could point to endemic problems of risk management at Credit Suisse. The Swiss company carried on working with Greensill despite internal concerns.

So if you see volatility in stocks like Viacom, Discovery, Credit Suisse, etc. in the coming days, you’ll know where it’s coming from. I do wonder if other stocks may be impacted by this forced selling of Archegos’ positions.

For more on what’s moving markets, check out these posts:

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