Could the Chinese Evergrande Disaster Spill into the Broader Economy? [Op-Ed]

by mcardinal

Dan Celia, President and CEO of FISM


Chinese property developer, Evergrande, missed a Thursday deadline to make an $83.5 million payment and their silence on the matter has left global investors wondering what lies ahead. In addition, Evergrande’s electric car unit warned on Friday that it faces an uncertain future unless it gets a swift injection of cash, the clearest sign yet that the property developer’s liquidity crisis is worsening in other parts of its business.

Chinese authorities told officials to prepare for the indebtedness of the developing firm. The firm is referred to as a “company in China.” They are not just a company in China. Like all Chinese companies, they are a communist-ruled company, owned by the Chinese Communist party. They are essentially filing for bankruptcy, although they refer to it as a “restructuring.”  In reality, the company will just cease to exist.

Countless investors will be hurt by this. We’re talking about an impact that could be as much as $400 billion dollars.  We don’t know yet the full extent of this storm and we most likely never will. The spillover effect and how it will impact, maybe even some American banks, will likely be covered up as much as possible. I am reasonably certain that the regulators in the OOC, the banking regulator organizations, and even the SEC will all be equally content with them not revealing this information because of the harm it could cause.

However, if you are investing in China, you are reaping the rewards of your own folly. Not only is it ethically compromising, it is financially irresponsible. Investment firms that have been investing their clients’ portfolios in Chinese companies should be held responsible for their reckless lack of discernment. They can attempt to rationalize it all they want, as some investment firms are doing now, but all justifications lack basic common sense. It is comical to try to defend investing in a company by using financial data and statements provided by a country known to propagate lies. You cannot treat these companies as if they are solid companies sharing their marketing data and market shares. There is no transparency – these investors are blindly banking on leadership that has given us every reason to mistrust them.

So many ‘brilliant’ analysts on Wall Street are simply accepting whatever the Chinese government says about their economic growth and stability. It’s very likely that President XI and a handful of advisors enjoy speculating on what ridiculous information they can get Wall Street to buy each day. “Let’s say that our unemployment rate is 4% today,” and “ Does anyone have any ideas what we should say our GDP growth is? Let’s say maybe 8%, or perhaps even 9% or 10%. Okay GDP growth is going to be 9%.” And then people on Wall Street say  “Oh my gosh, this company is amazing!” But wait a minute. Aren’t there a billion people walking around without any food to eat – people that are actually eating bark off trees trying to survive? Yet that’s nothing to be concerned about because their unemployment rate is “really low.”

Investors are beginning to feel the effect of Evergrande just deciding last week that they are not going to pay their interest payment. On the following day, investors were told, “Prepare yourself” because the demise of this company is likely at hand. The indebtedness of this property developer is  too high and they will never survive, so you might want to “get ready.” Well, how do you get ready? You can’t get ready. There is no getting ready for that. There is only the obvious solution – avoiding it in the first place.