Last summer, Hui Ka Yan, chairman of Evergrande Real Estate, showcased his remarkable skills in business dealings. He took a break from constructing and selling residential properties to engage in a deal involving China’s most prominent soccer team, which he sold to fellow billionaire and Alibaba Group chairman, Jack Ma.
“By chance, I got him drunk,” recalled Yan, recounting how the negotiation unfolded. “I mentioned that my Evergrande soccer team was planning to issue shares to raise funds for strategic growth, and he agreed to come on board. We wrapped it up in just 15 minutes.”
Such exemplary business moves have undoubtedly contributed to Yan’s impressive net worth of $6.4 billion. For Ma, acquiring this $192 million soccer team might have been a mere philanthropic gesture, given that his net worth stands at $22.5 billion, significantly overshadowing Yan’s.
One of life’s fascinating aspects is the ebb and flow of wealth. Who dispenses it, and who receives it?
For almost a quarter-century, money has shifted from west to east, creating a seemingly endless cycle of prosperity for China’s affluent. But is this trend genuine, or merely an illusion?
Pumping Credit
Cracks in the structure of China’s economy have become too pronounced to ignore. The once-symbiotic relationship between rising asset prices and escalating debt levels has started to falter. After years of relentless growth, home prices in China have begun to decline.
When a colossal mound of debt rests upon a shaky foundation, a downturn is inevitable. Yet, in the interim, financial authorities will likely strive to prop up asset prices by injecting substantial amounts of credit. Here’s an illustration:
“Chinese banks have extended $16 billion in credit lines to support one of the country’s largest and most heavily indebted homebuilders as pressures mount on developers struggling with a declining property market,” reported the New York Times.
“The action taken by a consortium of mostly state-owned banks to bolster Evergrande Real Estate Group—controlled by the colorful billionaire Hui Ka Yan—indicates the turmoil within China’s expansive housing sector. Developers are hurrying to secure financial support as sales volumes plummet and housing prices plunge due to an increasing surplus of unsold homes.
“Since February, Evergrande has secured new credit lines totaling 100 billion renminbi, approximately $16.2 billion. This includes a 30 billion renminbi commitment from the Bank of China, which considers the developer ‘its most important bank-wide long-term partner,’ as stated in a news release from Evergrande.”
China’s Economy is Doomed
Business acumen is often mistaken for sheer luck, especially when buoyed by a credit-fueled expansion and an asset price bubble. Take Donald Trump as an example; he may seem brilliant while the tide is rising but often finds himself caught off guard when it recedes.
When asset prices surpass sustainable levels, a correction becomes necessary. This results in vacant units and lower prices, impacting the egos of significant borrowers as well.
Hu Kai Yan might not be concerned that the company he founded is dependent on government support. He’s amassed a personal fortune by making bold investments and riding the wave of asset price inflation. However, the people of China will bear the burden of these socialized losses.
“At the end of June, Evergrande reported total borrowings of 151.8 billion renminbi [$24.6 billion], not counting an additional 44.5 billion renminbi [$7.2 billion] worth of perpetual bonds—a financial instrument with no fixed repayment date that the company classifies as equity.”
Perpetual bonds are undeniably a questionable financial innovation. They don’t require repayment and are billed as equity, maybe even eligible for further borrowing.
Ultimately, the Bank of China has overextended itself; it views Evergrande and other major developers as too significant to fail. However, allowing them to collapse would be the prudent course of action.
Regrettably, such a scenario is unlikely. This is why China’s economy appears destined to languish and struggle, mirroring the fates of the US, EU, and Japan.
Sincerely,
MN Gordon
for Economic Prism
