How to navigate Evergrande crisis, China experts explain risk/reward

10/14/2021 1:00:00 PM

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Big-name investors are navigating the China Evergrande crisis right now by turning to these 8 experts from firms like Muddy Waters and BCA Research

Insider tells the global tech, finance, markets, media, healthcare, and strategy stories you want to know.

Modern Land , asked to delay a $250 million bond payment due later this month.Reuters 2 minute read An excavator is seen at a construction site of new residential buildings in Shanghai, China, in this March 21, 2016 file photo.slipped 0.add more wind and solar power.

Bearish investors called the Evergrande crisis China's Lehman moment, but investment banks including Citi and Barclays have dismissed that possibility.As investors try to wrap their heads around the repercussions of what could soon become China's largest debt restructuring ever, Insider caught up with eight including hedge-fund managers and research analysts to figure out how they are advising investors to avoid risks and find opportunities amid the chaos.HK) indebtedness, although there is a risk of the property developer's pain escalating to cause broader financial stress, the IMF said in a report and comments released Tuesday.Matt Gertken, geopolitical strategist at BCA Research Matt Gertken is a geopolitical strategist at BCA Research.7% fall for the CSI300.BCA Research It is entirely possible that the Chinese government's reining in of excessive property debt and speculation triggers a nationwide economic and financial crisis, Gertken said.Debt-saddled Chinese property firms took heavy fire in bond markets on Tuesday.In his view, as developers scramble for cash, banks cut back on lending, and local governments struggle for revenues, policymakers are forced to guide the restructuring of Evergrande's debt and ring-fence the troubled developer to prevent financial contagion."Mining is price sensitive, so as to seek out the lowest-cost power and the lowest-cost power tends to be renewable because if you're burning fossil fuels.

"Even then, the reversion to autocracy and large financial imbalances make policy overtightening a major risk for the global economy, now and in the coming years," he added."They have the fiscal capacity and they have the legal and institutional tools to address this issue."A more sustainable rally may happen in January 2022 when banks have more front-loaded quota to extend credit to developers/mortgages.Junheng Li, founder and CEO of JL Warren Capital Junheng Li is the founder and CEO of JL Warren Capital.JL Warren Capital Li thinks Chinese authorities are trying to manage a soft landing scenario while allowing Evergrande to fail." Adrian said that "at the moment contagion is contained.In her view, allowing Evergrande to fall would achieve three objectives, one of which is reducing and controlling moral hazards among over-levered developers."Property bonds are lightning rods," said a director at a local brokerage."In other words, it is likely than not, that Evergrande won't be the last to fail," she explained.If the situation were to "escalate, there is a risk that broader financial stress may emerge, with implications for both the Chinese economy and financial sector as well as global capital markets at the extreme.S.

"Sunac, Country Garden, Greenland all have their fair chance to be distressed first and [then] restructured." An organized collapse would also reduce and control moral hazard among shadow banking or off-balance sheet lenders to developers.read more "As long as authorities have a clear plan, I would expect the situation gets resolved," Adrian said." In international debt markets, data provider Duration Finance showed Greenland Group Holdings' 6.She explains that shadow banking lends exactly like banks but they are not subject to the same regulations and stress tests, which allows shadow banking to lend more aggressively."This is why investors believe that the actual balance sheet of the developers is much bigger than reported, even including equity-linked debt instruments," she said,"and that overly stretched balance sheet is not unique to Evergrande, but common to the real estate industry as a whole.Reporting by Megan Davies; Editing by Andrea Ricci Our Standards: More from Reuters Sign up for our newsletter Subscribe for our daily curated newsletter to receive the latest exclusive Reuters coverage delivered to your inbox." As a result, the deleveraging campaign would target the entire food chain — not just developers but also home buyers, banks, the shadow banking system, and local governments.5% September 2023 bond slumped nearly 8 points to 63.You also want to make sure there are private property rights protections for the assets that you are relocating," said Darin Feinstein, co-founder of Core Scientific.

Lastly, the collapse of Evergrande would help centralize the real estate market.Currently, there are hundreds, if not thousands, of developers in China, many are private players that need to compete with state-owned enterprises, which have better and cheaper access to capital, according to Li.She points out that the consensus view on the most likely scenario for Evergrande is a state takeover where the government allows the"housing market to contract, home prices to soft-land, and make homes more affordable to the income-rich, asset-poor, young households.Global worries over the potential for spillover of credit risk from China's property sector into the broader economy kept spread - or risk premium - on investment-grade Chinese firms , which tend to have the most solid finances, near its widest in more than two months on Wednesday evening U." Shehzad Qazi, managing director, China Beige Book Shehzad Qazi is a managing director at China Beige Book.China Beige Book Qazi thinks that the markets' comparison of Evergrande's collapse with the Lehman crisis in the US is"not just overblown, but totally misplaced.Before bitcoin miners started coming to America, companies across the country made a gamble that eventually, if adequate infrastructure were in place, they would set up shop in the U.

" China, unlike the West, has a non-commercial financial system, so a Lehman moment is essentially impossible, he said.The spread on the equivalent high-yield or 'junk'-rated index that tracks firms such as Evergrande pulled back on Wednesday, but remained close to all-time highs.To manage the Evergrande fallout, the priority for Beijing will be dealing with consumers who bought pre-paid apartments, he said.In his view, domestic investors, particularly holders of Evergrande's wealth management products, are likely to get hit hard.Foreign investors, while they are not the specific target of these actions, are far down the list of parties that the government is worried about, he added.Sign up.Qazi said while Beijing will never allow a broad-based financial meltdown to take place, there is nevertheless plenty for investors to worry about.S.

"Investors need to prepare for a downshift in the property sector growth as it goes through what could be a long period of pain and restructuring," he said."On a broader level, investors need to watch for seismic shifts in China's growth model." He added:"It's becoming increasingly clear that the old investment and debt-heavy economic model has run out of road.There will be opportunities in China going forward, but only for those investors that adapt to the new normal." Jing Sima, China investment strategist, BCA Research Jing Sima is the China strategist at BCA Research.S.

BCA Research Onshore and offshore investors have different sets of concerns when it comes to the Evergrande crisis, said Jing Sima, BCA Research's China investment strategist.Global investors are worried about recovering their losses amid the Evergande fallout, she said."I think about two things," she said."One is they offload their investment in the Chinese high yield corporate bonds sector, whether the government is not going to [or will] bail out the company.Bailing out the company and bailing out the debt that the company owes are different things.and Canada," he said.

" The research firm doesn't foresee the government bailing out the embattled property developer."The bottom line is that global investors will be left with large losses in the offshore markets," she said.Investors are also concerned with whether the Evergrande crisis will become a widespread debt crisis, affecting other developers and the entire real estate sector in China.Onshore investors are not as worried about the default over Evergrande's debt, but are concerned about the slowdown in the Chinese economy and the real estate sector"and whether this is going to be a long-term thing or a cyclical event," she said.Yan Wang, chief emerging markets & China strategist, Alpine Macro Yan Wang is the chief emerging markets and China strategist at Alpine Macro.Though the global pandemic shut down large swaths of the economy, the ensuing stimulus payments proved a boon for U.

Alpine Macro In a recent research report, Wang made his view on the Evergrande crisis clear: that it is neither expected to trigger global contagion nor cause short-term economic pains."The Chinese government will not permit a messy Evergrande default to metastasize into systemic instability," Wang said in the report."Meanwhile, the country's largely state-controlled financial system does not operate strictly based on market principles, which ironically endows the system with counterintuitive resilience to manage this type of shock." Contrary to popular opinion, Wang thinks that the Chinese government is"rightly concerned about the country's sky-high property prices and worsening housing affordability." He attributes Evergrande's liquidity stress-turned solvency crisis to policy uncertainty.The appetite for large-scale investments had never been bigger.

"If anything, the Evergrande crisis is another deflationary shock to the Chinese economy, which will prompt an acceleration of the policy reflation that is already underway in China," he said.As for investors of Evergrande, debt holders will take a hit based on seniority, equity holders may very well be wiped out, and domestic banks' profits will also likely be negatively affected.Foreign investors with exposure to Evergrande's debt will not be immune to the losses either."Already, share prices of several key bondholders such as BlackRock have fallen off sharply," Wang said."More bloodletting is possible.in terms of its share of the global bitcoin mining market, with 18.

" Overall, he sees a"very low" risk of systemic failure.Despite having caused a global market sell-off weeks ago, the Evergrande crisis could create some good buying opportunities.It is also bullish for the US dollar but bearish for commodities, he said.Zak Dychtwald, founder and CEO at Young China Group Zak Dychtwald is the founder and CEO at Young China Group Young China Group From China's crackdowns on after-school tutoring, big tech, and crypto to the Evergrande crisis, the underlying theme tying it all together is the Chinese government's resolve to reestablish control over areas that have become risks to the stability of the state, according to Dychtwald.The author of the book"Young China: How the Restless Generation Will Change Their Country and the World" views the Evergrande crisis as a man-made rather than a"natural" economical disaster, he said."But as older-generation machines reach the end of their service lives, those companies will likely deploy new machines into more stable and energy efficient and renewable jurisdictions," he said.

"Remember, Evergrande's crisis was precipitated by the government's decision to reduce the amount of debt companies could take on," he said."Evergrande and other 'gray rhinos' were squarely in the crosshairs of the Chinese Communist Party." These debt-fueled"gray rhinos" refer to the likes of Anbang and HNA —"two of the most ambitious, unruly, and unwieldy of China's private companies," which had gone on aggressive acquisition sprees overseas before they"were recently effectively re-nationalized." Dychtwald thinks Evergrande is the next such target, but it is not going to lead to the type of Lehman collapse that sets off a global financial crisis.He explains that this is because homeownership is the ultimate financial cornerstone of the majority of China's middle class.

"More than perhaps anywhere else on earth, homeownership is an unwavering goal for much of the population, with over 90% homeownership throughout the country," he said."It comes at an immense cost, with the average cost of housing being grossly disproportionate with average urban incomes." As such, a full-blown real estate market crisis in China would"severely destabilize the country, create substantial cause for civil discontent," and trigger potentially even worse repercussions.Therefore, the most likely scenario for Evergrande is likely a government takeover preceded by massive debt defaults."Thinking of this as a crisis misrepresents what it is, a concerted effort from the Chinese government to re-nationalize its most unruly private companies, consistent with other regulatory efforts to bring most all global private companies into line," he said.

Carson Block, short-seller and founder of Muddy Waters Research Activist short-seller Carson Block is the founder of Muddy Waters Research.Muddy Waters Research Block passed on an opportunity to short Evergrande's stock about a decade ago even though he thought the Chinese real estate developer was"a completely screwed up company." "The accounting was opaque, there was a lot of debt, they had to grow in order to not collapse," Block, the founder of Muddy Waters Research, told Insider in a recent interview.He came to the conclusion after perusing a 120-slide report on the alleged insolvency of Evergrande, which had about $12 billion in liabilities back then.(The anonymous report was also sent to several other short sellers including Andrew Left of Citron Research.

) Since then, every time the subject of Evergrande was broached in conversations with fellow short-sellers in 2014 and 2015, Block thought it was not worth shorting."My view is that this thing doesn't make economic sense," he said."There obviously is a political reason that this company has not collapsed yet.There's so much that goes on behind the curtain to protect these guys, you cannot figure it out from the outside." Evergrande chairman Hui Ka Yan, a well-connected businessman and self-made billionaire still has a net worth of $11.

8 billion, according to Forbes estimates.But he no longer appears to have the political protections that helped Evergrande avert all the liquidity crises back then.Block thinks the apartments for which people have put down deposits will get built while onshore creditors such as non-bank creditors would get bailed out.Ultimately, he said it is unclear how the Evergrande crisis will be resolved, but he does not foresee a debt-induced financial crisis because"China has a well-used playbook for dealing with bad debts sitting on its banks' balance sheets." Jason Hsu, founder and chairman of Rayliant Global Advisors Jason Hsu is the founder and chairman of Rayliant Global Advisors Rayliant Global Advisors Hsu views the Evergrande crisis as a"financing liquidity issue" where because the company is so levered up that the government has forbidden financial institutions to lend more money to it.

He thinks that retail investors will most likely come out of the crisis unscathed."If you bought a bond through your local financial institutions, the local financial institution will basically step up and fully guarantee the repayment of the loan," he said.For institutional bondholders, depending on seniority, some will take a hit.However, in Hsu's view, the impending"collapse" could end up being a much cleaner bankruptcy process than many had envisioned.The way in which the Evergrande debt is sold is that they are always collateralized, so basically, every construction project that gets financed is a separate financing deal and a separate legal entity, according to Hsu.

Therefore, when a bank or financial institution thinks Evergrande is unable to make its payment, they can take away the collateral, take over the unfinished project, find another real estate developer to partner with, and claim first priority to the cashflow once the project is sold.Hsu estimates that Evergrande's local projects are still valuable enough that even though they are sold at a discount, it would only wipe out Evergrande's equity in the project but fully preserved the debt holders' value.Regardless, Evergrande will be significantly restructured, rendering its equity worthless in the process, Hsu said.This means that those who bought Evergrande stock will lose all their money and those who bought Evergrande's unsecured corporate bonds (about $19 billion in principal) are likely to see pennies on the dollar back because they don't hold collateral.Sign up for notifications from Insider! Stay up to date with what you want to know.

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大牌投资者现在正通过向浑水公司和BCA Research等公司的这8位专家求助来应对中国恒大危机

China has ability to address Evergrande situation, still risks remain -IMFChina has the ability to address the issues linked to China Evergrande Group's indebtedness, although there is a risk of the property developer's pain escalating to cause broader financial stress, the IMF said in a report and comments released Tuesday.

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