Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Threat of Chinese Evergrande systemic event overblown
Going by much of the press coverage on Evergrande (HKG: 3333), China’s second biggest property developer, it would appear that the world was teetering on the brink of another Global Financial Crisis. The company is desperately scrambling to push through a last-minute deal that will save it from formal default. However media pundits have been screaming “Chicken Little,” saying a default could trigger cross-defaults on other debt instruments and initiate a domino-like contagion effect whereby other property developers begin to collapse.
Michael John Lytle, CEO of Tabula Investment Management, thinks it’s all a little over the top. He agrees that the Chinese real estate market is over-inflated, with weak fundamentals, and that a stack of bond defaults could be on the way. But he says, “There are definitely reasons for concern, however, the situation may not be quite as disastrous as it seems.”
China Evergrande Group has somehow, so far, managed to cough-up the money to meet its September bond payment of US$83.5 million. Its total debts are around US$305 billion. Moves to sell a 50.1% stake in its property services arm (reportedly for more than US$5 billion) and its Hong Kong headquarters for US$1.7 billion had fallen through.
And this is the reason why fear has swept through markets. Everyone is concerned that creditors’ interests would not be protected.
Tom Essayes from wealth management industry research firm Sevens Report says, “What is happening to the company is of concern, but it’s being over-exaggerated. The markets are reacting in part because it was (sic) looking for a correction. US equities are priced to perfection in an imperfect market.” Essayes says the risk is largely domestic, as most of the problems are Chinese.
What everyone seems to be ignoring is the ultimate role of the Chinese Communist Party. At the end of the day, the central government will always step in and bail-out a private Chinese enterprise from collapse to prevent any wider-ranging impacts. Evergrande paid late, but did manage to pay and there’s no reason why it won’t next time.
The next deadline on a second offshore bond payment, worth US$47.5 million, looms next week. This interest payment was initially missed on September 29, but given a 30 day grace period.
According to a News Corp article, Governor Yi Gang from the People’s Bank of China (PBoC) argued that Beijing can “contain” risks to China’s financial system and economy stemming from Evergrande’s debt crisis.
And it’s exactly that. The Evergrande crisis is not a direct threat to China’s banking system, as its bank debt is widely spread among banks. In a worst-case scenario, it’s not out of the question to say that the government may take control of the situation by asking state-owned enterprises to underpin a full restructure. In that case, Evergrande would effectively transform into a state-owned enterprise. Problem solved!
