Every once in a while, there will be a large company that has overextended itself, often times the company seems to have the backing of the government, till it does not. The latest example is the Chinese company Evergrande Group.
In an article by James Griffiths of Reuters, Evergrande Group has about $300 billion in liabilities is China’s 2nd largest property developer. ($300 billion is roughly 2% of China’s GDP) In mid-September it owed $83 million payment on a $2 billion bond that was trading for 30 cents on the dollar.
The backstory is ever since China legalized private home ownership in 1998, real estate has been one of the country’s most successful sectors – with roughly 90% of households owning a home and the world’s biggest asset bubble. Chinese real estate is rife with speculation owing to easy credit and a massive oversupply. In 2018, a nationwide study found nearly 50 million apartments, about 22% of the country’s total housing stock sitting empty. Since 2010, housing prices are up 600%.
Evergrande is emblematic of the problem, the company owns more than 1,300 real estate projects in over 280 cities and creates about 3.8 million jobs a year. It has operations in many other fields including a football team and building a stadium for it, theme parks and many other ventures.
The company had backing and has backing from the Chinese government although the government was trying to slow down the real estate sector by introducing 3 red lines for developers. The lines were limits on debt to asset ratios, debt to equity ratios and cash to short term debt ratios. However Evergrande was above what the Chinese planners set out and nothing really happened.
In all likelihood, many believe the Chinese government will ensure Evergrande Group is restructured and life continues on.
Linking to dividend paying stocks, the more successful a company is the more goodwill it has with the government. The issue is always if the market change rapidly and the company lost money would the government set it to help? The answer is never a black or white one, for in politics the grey comes to light. As an investor, one hopes you have found alternatives (particularly when the company lowers its dividend payments) and watch what happens from the outside looking in.
There are more questions than answers, till the next time – to raising questions.