This Evergrande situation is really important for China. And, as we will see, really problematic.
Evergrande is the most indebted property developer in the world. Many billions in debts with estimates being that their total debt may be 3% of Chinese GDP. They employ circa 200,000 people with many, many more people providing services upstream or downstream. Hundreds of projects on the go across dozens of cities.
Will it be a major problem or slip silently away? Could it sink the Chinese economy?
I love this disclaimer. It’s more than a disclaimer - it’s become an investment cliché. A phrase I think most people are at least vaguely familiar with and have some (accurate) understanding of what it means.
And yet, what’s remarkable is that investors constantly think and act as if recent performance is their best indicator of future performance.
The psychologists like to use the term “recency bias” to describe this sort of behaviour – the reality that many individual’s perception of future events is excessively influenced by recent events.
It has been fascinating and troubling in equal measure to watch the rapid decline of interest rates to near zero. We have played financial limbo to the bottom of the cycle, and now face the dual challenges of how to escape low rates without destroying the economy and the enormous inequality gap between those who own assets and have benefitted from interest rate reductions and those who do not.
Last month's commentary on Evergrande and China resulted in some interesting discussions and today I want to explore some aspects in greater detail… probably venturing into some more controversial territory. How can China bail them out and maintain credibility and trust?