This week has seen ever-more news on the property front, which, as we said last week, is the market that cannot fall. Just like Lehman. Speaking of which, the assessors brought in to look at the state of Evergrande’s debt are the same company — Houlihan Lokey — which advised on the restructuring of Lehman Brothers all those years ago.
So Evergrande is one of the largest two or three property developers in China, and it has debts of $300 billion and clearly can’t cover them. Its main subsidiary, Hengda Real Estate, applied on Thursday to suspend trading of its onshore corporate bonds, so this is more than just an offshore debt problem. There were protests by investors at the company headquarters and elsewhere, and the question is, how will the Center deal with it, and what precedent will that set for other smaller property developers in a similar situation, and how to stop it all from unraveling. The best quote, snagged by the Financial Times, was from an advisor to the Natural Resources Ministry in Beijing who said that “The authorities were too idealistic, they didn’t expect market forces to go against their will.”
Unraveling is probably too strong a word, so we withdraw it, but there is a problem here, clearly. Underlying it all is market forces, the push and pull of supply and demand, and it would appear that demand is getting more sluggish and supply has overrunneth, while the speculative element of the market has been pushing prices up anyway. It’s said to be an iron bubble. Time will tell.
More evidence of a property dilemma was provided by the news this week that the sale of SOHO, developer of so many large and prestigious properties in all the major cities of China, to the US investment fund Blackstone had been abandoned. The deal was worth several billion USD, and the fact that it didn’t go through raises the question of why. Best guess is that the Center decided they didn’t want it to be concluded. Again, why? Who knows? But the SOHO properties and their owners represented the sense of Dengist private entrepreneurial diverse international business dynamism that seems to be frowned upon the new era of “common prosperity.” SOHO’s share price plummeted 40% the day after the announcement.
Otherwise, the virus has stuck its head up in a couple of places, including Xiamen, but the likelihood is that it will be resolutely controlled. But how long will the Chinese authorities hold to the zero tolerance policy? The answer is probably longer than you think.
Enjoy the full moon and the mooncakes, if you partake, and have a great weekend, long or short.