Top 10 Investor Ramifications of Evergrande’s Default.
As feared, China’s second-largest real estate developer, Evergrande, missed their post grace period $131 million debt payment, officially putting their $300 Billion in debt into default.
So, what’s the big deal with the Evergrande default and collapse?
- Evergrande’s default is the first big-official domino to fall. The others are starting to fall now.
- Wednesday’s default will cascade into many dire economic ramifications. Supply chains will be affected around the world.
- Many of the other Chinese developers are also in trouble.
- And will soon reach your portfolio.
- There will be many losers and some winners. As an investor, you need to find and pick the winners.
- If you can identify the change, only then can you find investing opportunities.
Here are the top 10 investor ramifications to Evergrande’s default.
I. Devastated Evergrande Creditors.
With the impending bankruptcy of Evergrande, creditors will not be paid and will suffer the loss. Many of the creditors are in China, and many are around the world. Your portfolio may or may not be linked to some of the failing or financial companies devastated by the direct total or partial loss of worthless loans.
II. World-Wide supply chain turmoil will impact global sales, production, and investor returns
With Chinese banks in trouble or failing, leading will drastically tighten. Tight money will affect all aspects of business in China, but most importantly, manufacturing. China’s manufacturing is the biggest supplier to the world’s supply chain.
- If the Chinese manufacturers cannot get short-term loans to buy their raw materials, that results in orders not being filled by the lack of production of the products for the world supply chain.
- Plus, the Chinese manufactures will not have the funds to purchase the sub-parts and raw materials to do their projects. As a result, China’s suppliers cannot sell their products to China, causing exponential macroeconomic problems around the world.
III. Loan scarcity and inflation.
- Due to the loan scarcity for Chinese manufactures, the only loans the will be completed with be for very high rates due to the scarcity of funds and risk.
- This will further make Chinese products more expensive and more costly.
- By the products being more costly, it makes competitive products of other countries more attractive and with less supply chain risk.
IV. GSP Trade Benefit is going away on 12/1/2021 on December 1st, 2021.
- 32 countries will eliminate the lucrative trade benefit the PRC has enjoyed yielding reduced tariffs and other favorable trade terms. The cancelation of the GSP Trade Benefit will put the PRC on even footing with the rest of the world, which will be a blow to China’s competitive advantage.V. The exodus of off-shore manufacturing companies leaving the PRC is inevitable.
- Some percentage of multi-national companies are doing the math and are seeing the risk of doing business in Communist China is now more than the benefit. The new calculus will speed up the exodus of off-shore companies fleeing China for less risky business environments.
V. The elimination of a percentage of disposable income of millions for a generation of Chinese consumers will affect China and the world for decades.
- Evergrande is still responsible for 1.6 million unfinished apartments or condos. Most all of the condos were pre-sold to Chinese families with their life savings—even multi-generational life savings. Thus, eliminating disposable income for millions of Chinese consumers for decades.
- Currently, there are entire cities of unoccupied and unfinished apartment/condo buildings. These are buildings that will never be finished or occupied. Last week some unfinished build were demolished.
With the PRC’s latest official announcement that “Evergrande is not too big to fail,” the buyers of the properties have a near-zero chance of getting their investment back.
VI. Evergrande’s 200,000 employees and supporting companies.
- In September of 2021, “Evergrande management told their employees either lend us cash or lose your bonus,” according to the Wall Street Journal on 9/19/21.
- Losing 200,000 jobs is bad, but the macroeconomic effect could lead to one or two million other jobs lost due to lack of needed services and non-payment of accounts receivable.
VII. Coal, cold, Australia, and a plan that completely backfired on the PRC.
- In an aggressive Machiavellian power play earlier this year, the PRC banned most imports from Australia. The list included coal, wine, and other products. Why? I can’t say in this post for fear of media retaliation.
- The PRC needs coal to run its 1,087 operational coal plants.
- Without this coal-generated electricity, much of China’s manufacturing will stop, exports will slow, and the Chinese people will not have heat this winter.
- In the PRC’s rage to punish Australia over comments in the media, they stopped the import of coal. This move backfired on the PRC in multiple ways.
- Manufacturing companies in China experience intermittent blackouts. Some scheduled and some not, making it hard to run factories.
- It is suspected that the lack of reliable power to run their plants may be the last straw for many foreign companies and may be planning to move their operation elsewhere.
- The PRC may begin to face further resentment from the 1.4 Billion people if they cannot hear their homes or find a job. If the PRC loses the “Mandate from Heaven,” the PRC leaders may become desperate.
- The communist leadership’s power and lives may be in jeopardy resulting in irrational and desperate decisions with dire consequences.
VIII. Australia endured the stoppage of exports from China.
They were highly concerned. However, other countries and companies started buying Australian coal, and the price of coal went up.
- This resulted in Australia’s net profits unexpected rose, even with the PRC embargo.
- So, Australia is the big winner
- and the PRC is the massive loser.
- Out of desperation, the PRC has recently “un-officially” has started unloading coal from Australia in October of 2021.
IX. Malaysia, The PRC, and the Straight of Malika
- It was announced this week that Malaysia had canceled the $1.8 Billion train project.
- It is suspected that this is another infamous PRC “Belt and Road” project.
- What makes this even more significant, it that life in China depends on the Chinese trade and oil traveling freely through the geographically critical Straight of Mikala navigational choke point.
- The PRC has used the Belt and Road project to build infrastructure in a smaller country and then seize ports when the county defaults via foreclosure.
- The Malika Straight is key to China’s survival. By the PRC not having access to this leverage, they will have to only rely on the People’s Liberation Army Navy (PLAN) to keep their access to the valuable two-mile-wide straight or try to take the vital Malika straight by force.
- Thus, surely starting world war III. Would and could this happen? Absolutely. Just ask India.
Investors need to include this in their investment decisions.
X. Where are the best countries for relocating manufacturing plants? Relocating these plants “quickly and efficiently” is the key for investors.
- If thousands of manufacturing companies start fleeing the risks of the Chinese mainland, where are they going?
- I foresee India, Mexico, the US, and the Philippines as being the biggest winners at targets for relocation and targets for investors.
- Vietnam, Thailand, and Cambodia will gain some manufacturing. However, being geographically restricted by the South China Sea, the PLAN’s aggressive dominance, trolling, and retaliation risk may be too significant.
- Look for companies that have a plan to move their manufacturing to locations with less business risk faster.
In Summary of the Evergrande Default Ramifications
- The main risk to the world and investors is if China’s economy spirals out of control, the supply chains will fail until plants can be successfully moved. It will take years for many of the relocated plants to be back online.
- The Mandate from Heaven. The Chinese “Mandate from Heaven” is a real thing and is a life-or-death concern for all leaders at all levels in China. Suppose the PRC (China’s community leadership) becomes desperate for fear of losing the support of the 1.4 Billion people. In that case, the PRC could become unpredictable, which could lead to a shooting war.
- Investors may want to focus on companies with the ability to move their plants to India, The Philippines, Mexico, and back to the US quicker than their competitors.