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Speaker 1: Hello, and welcome to another episode of the Odd Thoughts Podcast.

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Speaker 1: I'm Tracy Allaway and I'm Joe Wisntal So, Joe, how

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Speaker 1: much do you know about China Everground. So I was

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Speaker 1: gonna start by saying, I think this is going to

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Speaker 1: be one of the episodes where I sit back and

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Speaker 1: do a lot of listening. I'm excited to participate in it,

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Speaker 1: but I know that it's a very big real estate

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Speaker 1: development company in China, and they've had financial troubles, and

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Speaker 1: that really is about the extent of my knowledge. I

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Speaker 1: have no doubt that you're going to ask some really

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Speaker 1: interesting questions, but I guess just to introduce the topic,

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Speaker 1: I mean, China Everground has sort of loomed large in

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Speaker 1: Asia for a long time, and I think anyone who

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Speaker 1: has any interest in Chinese UM, the news, economy, or

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Speaker 1: Chinese finance has probably heard of the company. I've always

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Speaker 1: described it as the poster child for politically well connected

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Speaker 1: but over indebted Chinese real estate firms. And I know

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Speaker 1: that sounds like a really niche category, but there are

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Speaker 1: actually a lot of companies UM that would match that description,

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Speaker 1: but China Everground was like the ultimate one of those

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Speaker 1: it ended up being this really weird mix of a

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Speaker 1: property company, you know, a real estate developer, but it

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Speaker 1: also had a healthcare division, um, and it also develops

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Speaker 1: its own electric cars. And it also has like a

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Speaker 1: mineral water business and theme parks. And the interesting thing

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Speaker 1: about yeah, I was about to mention so, and the

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Speaker 1: interesting thing is like they've always kind of aligned themselves

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Speaker 1: with the political goals of the Chinese Communist Party. So,

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Speaker 1: for instance, I think President she Being made like this

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Speaker 1: throwaway comment about how he wanted China to a force

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Speaker 1: in soccer one day, and he was hoping they would

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Speaker 1: win the World Cup, and like suddenly, China everground starts

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Speaker 1: splurging on the soccer team and spending millions of dollars

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Speaker 1: on players to you know, fulfill She's ambitions. So it's

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Speaker 1: ended up being this really unique company that is very

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Speaker 1: aligned with Chinese political goals. But what's been happening lately

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Speaker 1: is that it has run into all sorts of financial

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Speaker 1: trouble to the point that people are talking about the

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Speaker 1: possibility of outright failure or maybe a bailout or some

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Speaker 1: sort of restructuring. I am very excited about this one.

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Speaker 1: I mean, I think like like I said, I don't

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Speaker 1: really know that much about it. I assume that there's

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Speaker 1: my sense is that the frailties of the model have

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Speaker 1: been understood for some time. On the other hand, when

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Speaker 1: you have a company, as many companies of China seemed

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Speaker 1: to be, but when you have a company that has

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Speaker 1: such alignment with the government or with the the Communist Party,

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Speaker 1: you have to assume that betting against it is very

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Speaker 1: risky because in the theory there could be infinite bailouts

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Speaker 1: or debtrastructuring and so forth. I feel like I will

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Speaker 1: just I don't know, I will learn a lot about

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Speaker 1: how everything works from this story. And I got to say,

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Speaker 1: there's a ton of interest in this at the moment

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Speaker 1: because some people are talking about this as China's Lehman

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Speaker 1: Brothers moment, although you know, I personally think it's not

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Speaker 1: going to go quite that far. But we'll get into it.

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Speaker 1: And I'm really really excited for this one because we're

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Speaker 1: going to have on someone who I've been meaning to

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Speaker 1: get on all thoughts for a really long time and

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Speaker 1: I just didn't have the right opportunity. But now China

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Speaker 1: everground has come up, and he's really the perfect person

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Speaker 1: to talk about it. He told people to short the

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Speaker 1: stock in eighteen so he's got the call, you know,

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Speaker 1: consistently right for the past three years. We're going to

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Speaker 1: be speaking with Travis Lundie. He's an independent special situations

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Speaker 1: analyst who publishes on the Smart Karma platform based in

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Speaker 1: Kong as m I and one thing I should mention

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Speaker 1: before we bring Travis on. We are recording this on September.

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Speaker 1: China Everground is a really fast moving story. UM, so

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Speaker 1: a lot could happen between now and when this episode

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Speaker 1: actually gets published, So please keep that in mind and

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Speaker 1: without further ado, Travis, welcome to the show. Thank you

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Speaker 1: for having me, Joe and Tracy. It's a it's a

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Speaker 1: privilege and pleasure to be here. So I guess my

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Speaker 1: first question is, you know, people have been writing and

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Speaker 1: talking about how strange a company China Everground is for many,

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Speaker 1: many years now. I described it as this weird conglomerate

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Speaker 1: involving a bunch of different businesses. I think at last count,

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Speaker 1: it had something like three hundred billion dollars worth of

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Speaker 1: total liabilities. Everyone knew that it had been borrowing a

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Speaker 1: lot of money, and yet the financial difficulties seem to

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Speaker 1: have snowball extremely quickly and come to be four of

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Speaker 1: the market's attention, you know, just in the past month

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Speaker 1: or so. I guess the question is why now when

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Speaker 1: we all knew about these frailties for some time. That's

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Speaker 1: a good question. I think you're right in calling it

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Speaker 1: a weird conglomerate of of businesses. You can see that.

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Speaker 1: You know, originally it was just a real estate developer,

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Speaker 1: and then when it listed in two thousand nine, almost

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Speaker 1: immediately afterwards, they bought into guang Zoe Football Club in

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Speaker 1: the Chinese Super League and then proceeded to turn it

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Speaker 1: into Guang Joe ever Grand and then just Evergrand Football

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Speaker 1: Club ever Grand, and then they started spending, as you said,

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Speaker 1: millions of dollars on players, and they spent an enormous

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Speaker 1: amount of money. Eventually they sold that, but they they

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Speaker 1: started a dairy business and grains and oils business. They

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Speaker 1: started a bottled water business. Uh, they're out of the

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Speaker 1: dairy and the grains, and they sold the water business.

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Speaker 1: Then they bought the water business back, and then they

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Speaker 1: hold it again recently. The ever Grand Health business was

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Speaker 1: meant to be healthcare, but really what it was was

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Speaker 1: really property related to health care. Uh. And then they

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Speaker 1: decided to you know, get into the new energy vehicles

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Speaker 1: electric cars a few years ago, and you know, political alignment,

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Speaker 1: as you said, and you know, they have yet to

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Speaker 1: make a car, but they've taken on a lot of debt.

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Speaker 1: So the company has effectively built itself up and built

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Speaker 1: itself up to be too big to fail. Now we're

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Speaker 1: coming to that testing point of whether it really is

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Speaker 1: and I think, I think what happens here is if

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Speaker 1: you look at the way real estate development in China works,

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Speaker 1: it's it's a very heavily levered business. It's just just

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Speaker 1: structurally hugely levered. For the people who grow quickly. You

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Speaker 1: end up you put a little bit of capital down,

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Speaker 1: You borrow a bunch of money, You buy some land,

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Speaker 1: you pay for some of it later, You build a foundation,

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Speaker 1: You get people to put some deposits up, You start

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Speaker 1: hiring people to to work, You pay them three months

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Speaker 1: or six months later. And then as the people put

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Speaker 1: down the mortgage money, you draw down the mortgage money

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Speaker 1: to pay off the contractors. You end up putting a

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Speaker 1: dollar down to you know, buy to put together a

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Speaker 1: billion dollar project. If you end up with two million

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Speaker 1: dollars at the end. That's a pretty good result. If

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Speaker 1: you do that again and again and again, you end

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Speaker 1: up with a huge amount of debt and then you say, great, well,

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Speaker 1: I want to do this again and again, so I

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Speaker 1: need to go buy some land. So these companies have,

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Speaker 1: you know, built up land banks with five years worth

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Speaker 1: of land. So you take down a huge amount of

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Speaker 1: debt to build the land bank, and you hope that

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Speaker 1: the you hope that the land bank appreciates and the

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Speaker 1: average real estate property price which is going to go

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Speaker 1: on top of that land bank, it appreciates at a

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Speaker 1: rate higher than you're funding. So if you're funding a

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Speaker 1: coupon at ten for your debt and your asset in

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Speaker 1: place appreciates by you've got fift five carry on a

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Speaker 1: very very large business. So it's been a very good

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Speaker 1: plan to grow. But you have to keep on growing.

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Speaker 1: You can't ever stop growing. If you do stop growing,

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Speaker 1: you actually have to take on the the goal of

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Speaker 1: selling down assets. You have to shrink your gross balance

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Speaker 1: sheet by selling already developed properties or selling off assets

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Speaker 1: which aren't growing fast enough, and then you have to

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Speaker 1: start repaying debt because at some point, if you ever

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Speaker 1: get a margin squeeze, it's all over and right now

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Speaker 1: you ask, you know why now? And that's really what's happening.

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Speaker 1: We saw a brief dip in the total value of

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Speaker 1: real estate residential real estate sold in two thousand fifteen.

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Speaker 1: It picked back up again, and you know this year

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Speaker 1: it's a pretty grim environment for everybody. Part of that

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Speaker 1: is policy driven, and I think that the government has

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Speaker 1: a significant influence on that. To say that the that

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Speaker 1: the government has set in place policies which make it

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Speaker 1: less attractive to buy real estate and less attractive to

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Speaker 1: sell secondary real estate. And if that continues, then there's

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Speaker 1: there's going to be weakness. What don't you just put

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Speaker 1: in perspective the size of this company? Obviously, we know

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Speaker 1: real estate is you know, this massive, this massive share

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Speaker 1: of the Chinese economy. We know that for millions of

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Speaker 1: Chinese citizens, real estate is a sort of crucial savings

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Speaker 1: and investment vehicle. How big is the industry and how

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Speaker 1: big of a role specifically does ever Grand planet uh

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Speaker 1: the industry is? It can be difficult to measure. There

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Speaker 1: are different ways of looking at it. One way of

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Speaker 1: looking at it would be to say that it's about

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Speaker 1: sixteen to seventeen percent. I think of g d P,

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Speaker 1: which is, you know, high. It's higher than than the

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Speaker 1: US was. I think in two thousand seven it was

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Speaker 1: higher than Japan was in if you take the combination

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Speaker 1: residential and commercial construction UH and development, we're talking close

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Speaker 1: to which is I think, not quite double the peak

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Speaker 1: of the Japanese experience in the late early, very early.

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Speaker 1: Ever Grand was the second largest in terms of sales

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Speaker 1: last year, I believe, if not quite the largest. They

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Speaker 1: trail VANKI I think ever so slightly. You mentioned three

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Speaker 1: billion dollars of liabilities. Yes, that's the number, three billion

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Speaker 1: dollars of liabilities. That's not perhaps everything out there, because

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Speaker 1: one of the ways companies deal with their business is

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Speaker 1: that they develop things where they don't actually consolidated. They

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Speaker 1: go into a joint venture. They buy the land in

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Speaker 1: two thousand sixteen, they sell it to a joint venture

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Speaker 1: in two thousand seventeen, the joint venture starts building things.

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Speaker 1: In two thousand eighteen, they do contracts with ever Grand,

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Speaker 1: but the actual ownership of that vehicle which is doing

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Speaker 1: the development isn't more than owned by ever Grant. There

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Speaker 1: are a bunch of developers in China, which have an

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Speaker 1: extraordinary amount of their assets and sales coming from those

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Speaker 1: joint ventures. The companies are basically tied to ever Grand

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Speaker 1: or tied to the developer in question. Branded that way,

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Speaker 1: everybody knows it's exactly that particular developer, but they're not

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Speaker 1: accounting wise. They're not consolidated on the balance sheet, which

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Speaker 1: means the debt which is on those entities is also

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Speaker 1: not consolidated. We just don't know how much there is

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Speaker 1: among the companies. If you talk to them and about them,

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Speaker 1: Evergrand will claim to not have that much of that

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Speaker 1: kind of debt. Others will. A company of like Sichuan,

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Speaker 1: Languan or al Uan had substantially more debt in the

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Speaker 1: j vs. If you look at the employment, it's officially

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Speaker 1: something like a hundred and sixty thousand employees. It's something

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Speaker 1: like hundred project sites across two hundred I think two

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Speaker 1: hundred and seventy cities across hip across China. It's a

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Speaker 1: very very big operation. The average project takes between twelve

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Speaker 1: and twenty four months. It involves really many, many hundreds

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Speaker 1: of thousands of workers in Evergrand and in the supplier community.

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Speaker 1: I saw something on on Twitter in one of your

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Speaker 1: one of your competitive stories that the three billion dollars

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Speaker 1: was two of China GDP. I'm actually not sure of

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Speaker 1: the number, but that's that's a big thing. However, if

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Speaker 1: you look at the next largest liability total out there,

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Speaker 1: it's it's Country Garden Holdings and they're also competitive in

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Speaker 1: the same space, and they're about two hundred and seventy

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Speaker 1: billion dollars in liabilities. And then Thankye, which is the

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Speaker 1: you know, the healthier big dog of in the tall weeds,

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Speaker 1: they're about two fifty billion dollars of liabilities. The industry

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Speaker 1: is very big. It's a very big piece of the economy.

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Speaker 1: Those liabilities mean debt which needs to be paid to banks,

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Speaker 1: It means payables which need to pay be paid to

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Speaker 1: contractors who have done the work but haven't gotten paid yet,

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Speaker 1: taxes to be paid. Its employee salaries. Uh. And it

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Speaker 1: is of course homes which have to be delivered to

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Speaker 1: millions upon millions of people who put down their hard

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Speaker 1: earned money to buy their dream. I want to get

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Speaker 1: into the sort of funding mix or the credit or

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Speaker 1: mix in a little bit, but before we do, you

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Speaker 1: mentioned China clamping down on the real estate sector, And um,

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Speaker 1: you know you and I are both in Hong Kong,

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Speaker 1: so I wouldn't ask you if this was a policy

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Speaker 1: mistake by China to actually, you know, go after a

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Speaker 1: sector that makes up something of its GDP at a

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Speaker 1: time when there's a global pandemic and an economic slowdown.

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Speaker 1: But what I would ask is, isn't it a little

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Speaker 1: weird that we've had this crackdown the three red lines

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Speaker 1: policy for over a year. I think it was like

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Speaker 1: introduced in in August of and it was supposed to

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Speaker 1: make the real estate sector safer and start cutting down

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Speaker 1: on leverage there. So we've had it for over a year,

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Speaker 1: and yet like it seems like people weren't really paying

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Speaker 1: attention to it until potentially the summer, and suddenly it

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Speaker 1: kind of exploded into the public consciousness and it became

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Speaker 1: clear this was actually a problem for a company like Evergrand. Uh. Yeah,

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Speaker 1: we can actually go back a little bit further. Evergrand.

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Speaker 1: Evergrand had its explosion in the stock price in two

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Speaker 1: thousand seventeen two thousand eighteen. In two thousand seventeen, chairman

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Speaker 1: him became the the wealthiest man in China at the time.

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Speaker 1: He also said, we want to reduce debt. At the time,

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Speaker 1: in the mid teens plate teens. Ever, Grand was issuing

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Speaker 1: a lot of bonds. They were issuing a lot of

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Speaker 1: bonds that are relatively high coupon. By the time we

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Speaker 1: got to the end of two thousand eighteen, the p

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Speaker 1: POC had decided they were large enough and you know,

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Speaker 1: basically publicly made them and the world aware that they

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Speaker 1: were red flagged for being a very indebted company, which

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Speaker 1: could cause some systemic risk if there were a big problem.

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Speaker 1: So that was November two thousand eighteen, where it's almost

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Speaker 1: three years ago. In early two thousand twenty, I think

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Speaker 1: April two thousand twenty, the chairman stood up and said,

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Speaker 1: we plan on reducing debt by four and fifty billion

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Speaker 1: RMB over the next three years, targeting fifty billion RMB

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Speaker 1: per year. And then the summer kind of progressed. The

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Speaker 1: shares were down in May and they entered they entered

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Speaker 1: a buy back program and they bought the stock. I'll

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Speaker 1: be gentle about how I say they bought the stock,

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Speaker 1: But the stock went from thirteen dollars to twenty dollars

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Speaker 1: in the space of probably six weeks, just a couple

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Speaker 1: of days into July, they released a press release saying, hey,

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Speaker 1: we just did really great in the first six months

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Speaker 1: of the year. The stock jump in three days, the

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Speaker 1: stock dribbled back down. The company sold some shares in

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Speaker 1: some of its units which had done well, and that

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Speaker 1: was I think, to raise capital. And then they warned.

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Speaker 1: They came out with a profit warning. Now you're out

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Speaker 1: there saying we're going to do great things, and we're

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Speaker 1: buying back the stock, and you're buying back the stock

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Speaker 1: into the end of the first half, and you know

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Speaker 1: what's going on here, and then you come with a

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Speaker 1: profit warning that's not exactly something which is terribly encouraging.

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Speaker 1: Four days after the profit warning, they were called onto

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Speaker 1: the carpet to talk about the red lines. And then

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Speaker 1: four or five days later we had that episode of

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Speaker 1: the magic Letter, which wasn't real, but you know, cause

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Speaker 1: some concern. I think at that time people understood they've

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Speaker 1: been warned that they had to reduce debt, and that

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Speaker 1: was the line in the sand where that red line

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Speaker 1: meeting came in. Just around the time in the meeting,

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Speaker 1: it was pretty clear that the PBOC and the c

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Speaker 1: B I r C had decided that banks were not

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Speaker 1: going to lend more to the real estate developers, and

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Speaker 1: so they had already been quietly rejecting them, and then

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Speaker 1: the red Line meeting went through, and then they systematically

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Speaker 1: started rejecting and going forward. I think that people ignored

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Speaker 1: the risk and maybe you know, the letter being denied

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Speaker 1: regarding the possibility that that ever grand get help from

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Speaker 1: the Guangho government. Officially, that made everybody, you know, comfortable. Unofficially,

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Speaker 1: you know, they launched an equity offering which managed to

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Speaker 1: sell about half of what it wanted to sell. The

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Speaker 1: stock went was a huge discount. The stock went down.

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Speaker 1: You know. In the following a week or two, they

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Speaker 1: bought back some stock, The stock rallied a bit, They

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Speaker 1: canceled their program to list hung in the ashare market.

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Speaker 1: Things just kind of snowballed. And I think that people

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Speaker 1: were complacent. I think that's the safest thing to say.

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Speaker 1: That it's obvious it was if things were slowing down.

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Speaker 1: That's something which just it rolls into a problem relatively quickly,

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Speaker 1: even though it's not a problem yet, it rolls into

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Speaker 1: a problem relatively quickly. And you know, the credit market

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Speaker 1: was relatively prepared for this. I mean back in November

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Speaker 1: two thousand eighteen, when the doc said that Evergrand went

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Speaker 1: out there and raised money. So it's not as if

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Speaker 1: the market was unaware that this deserved very, very high

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Speaker 1: credit risk attached to it. I don't know that commentators

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Speaker 1: in general were that tied. You know, obviously you had

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Speaker 1: Dan Wang on he was talking about how this sector

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Speaker 1: had really taken over the imagination of of how people

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Speaker 1: invest in China. Uh, and it had gotten maybe a

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Speaker 1: little bit out of hand. Well, you know, real estate

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Speaker 1: developers have not been a very popular place to be invested.

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Speaker 1: So it's not like hedge funds go chase their equities.

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Speaker 1: High yield investors like them because they think that the

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Speaker 1: the sector itself is too big to fail. But I

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Speaker 1: don't know that the level of interest has been high

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Speaker 1: enough to sustain ongoing conversation about the danger. Can we

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Speaker 1: talk about this too big to fail question? Because I

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Speaker 1: brought it up, I think you the intro and from

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Speaker 1: from a very distant perspective, this seems to be one

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Speaker 1: of the problems with any sort of shorting of China.

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Speaker 1: And of course for years people have talked about leverage

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Speaker 1: and dead and unsustainable speculative booms and banks that make

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Speaker 1: all kinds of bad loans, and of course the real

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Speaker 1: estate developers. And yet there is this perception that at

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Speaker 1: least for many companies, either they are state owned or

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Speaker 1: highly state affiliated, and that means it's very difficult to

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Speaker 1: bet on their demise. Can you talk a little bit

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Speaker 1: about I guess perhaps the gradations of too big to

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Speaker 1: fail nous and how much that's worth to various companies

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Speaker 1: to be seen or to be affiliated with the state

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Speaker 1: or with the party such that that does provide investors

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Speaker 1: with some level of protection. That's a good question. That

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Speaker 1: is a good question. Um, it's a sensitive question, and

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Speaker 1: I think it's I think that that the sensitivity and

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Speaker 1: and actually the answer itself will oscillate with the times.

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Speaker 1: If you look at real estate by itself, there are

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Speaker 1: some s O s uh state owned enterprises who are

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Speaker 1: in the real estate business, but there are a number

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Speaker 1: which are private. Those which are private have always had

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Speaker 1: to have, you know, political connections. How you actually get

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Speaker 1: your hands on the land in the first place is

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Speaker 1: a really good question. You know, you have a government

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Speaker 1: sales process, well, you know, government sales processes across the

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Speaker 1: world are sometimes questioned for their fairness and when one

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Speaker 1: particular party ends up with a very big piece of

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Speaker 1: that business, one wonders even more. So there are obviously

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Speaker 1: all kinds of interesting problems about discussing what the opportunity

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Speaker 1: said is for a private company when they're competing against

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Speaker 1: Satown enterprises. And what generally private company end up doing

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Speaker 1: in China is they go find a niche, and they

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Speaker 1: find a niche which state enterprises aren't doing, or they

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Speaker 1: find a niche which is politically supported enough that they

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Speaker 1: get supported by themselves from the local from the local governments.

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Speaker 1: You know. Ever, grand is A is a company which

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Speaker 1: does a lot of They spend a lot of money

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Speaker 1: selling and they do a lot of stuff in second

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Speaker 1: and third tier cities rather than first tier cities, and

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Speaker 1: that endears them to a large number of cities because

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Speaker 1: they provide funding through the land sale process to a

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Speaker 1: large number of cities. They are politically connected, they are

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Speaker 1: they are a partner any as much as you can be.

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Speaker 1: Anybody who's that big and that important to the local

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Speaker 1: economy is a partner. And so then the question becomes

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Speaker 1: would they get pushed out because they're you know, not

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Speaker 1: an s O E. I think it's difficult to say, though.

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Speaker 1: I think that if you go back to what your

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Speaker 1: podcast with Dan Lang touched upon, there was really a

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Speaker 1: question about whether unbridled speculation and unbridled land grab, forgive

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Speaker 1: the pun, is an appropriate use of the national resource.

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Speaker 1: And as Dan said, you know, a very common phrase

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Speaker 1: these days picking up more and more interest in both

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Speaker 1: the local and the international press is common prosperity. And

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Speaker 1: you know one guy who's the biggest, the wealthiest guy

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Speaker 1: in China based off of selling the savings assets that

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Speaker 1: millions of Chinese people will then own as their primary

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Speaker 1: source of household wealth. You kind of wonder whether that's

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Speaker 1: in line with the common prosperity. So I think this

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Speaker 1: the idea that President Hijimping had come up with, you know,

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Speaker 1: years ago at this point, which is that that housing

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Speaker 1: is for living in, not for speculation. I think that

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Speaker 1: came over the top. And obviously some of the other

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Speaker 1: policies that Shi Jimping has come up with have been

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Speaker 1: pushed relatively hard more recently. And you asked a question,

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Speaker 1: Tracy about whether this was a wise idea or maybe

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Speaker 1: we don't ask the question whether it's a wise idea,

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Speaker 1: but the goal of making housing affordable when it grows

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Speaker 1: out of affordability. Every single year, it grows further and

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Speaker 1: further away from the range of what a median person

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Speaker 1: would call affordable. Bringing that back in line is it's

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Speaker 1: kind of an obvious thing for essentially managed economy. I

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Speaker 1: think the real question one could ask is why did

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Speaker 1: it take so long? Um? Sorry, do you have an

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Speaker 1: answer to that? Or what is the answer to What

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Speaker 1: is the answer why it took so long? I think

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Speaker 1: that the Chinese Communist Party led by Shi Jimping is

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Speaker 1: and has been if you look at the writings and

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Speaker 1: the emphasis on policy and policy study and study of

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Speaker 1: his philosophy governance of China. Um, the goal really here

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Speaker 1: is is to instill a sense of China nos and

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Speaker 1: unity across the population. It doesn't work on all people immediately,

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Speaker 1: and so the goal here is I think too. You know,

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Speaker 1: as they increase the number of Communist Party cadres sitting

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Speaker 1: inside the Communist Party cell inside a company, or they

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Speaker 1: provide guidance or they try to direct g d P

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Speaker 1: in a certain direction, companies like ever Grand or indeed

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Speaker 1: Vank your country Garden, they're all kind of they're pulled

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Speaker 1: back and forth you can't get smaller and shrink suddenly

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Speaker 1: in order to save yourself because that would hit GDP.

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Speaker 1: But um, and you can't default on things because that

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Speaker 1: would hurt the homeowners. You know. One of the big

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Speaker 1: places where people protest in China is actually when housing

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Speaker 1: developers lower the prices of the properties they sell. That's

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Speaker 1: kind of a weird thing the but what happens there

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Speaker 1: is that the existing property owners don't want to see

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Speaker 1: a mark to market at a lower price when it's

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Speaker 1: you know, sold to somebody else down the street. That

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Speaker 1: makes them feel really bad and they get really upset

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Speaker 1: and they go protest in front of city hall. Now

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Speaker 1: we've got slightly different protests this week, but historically developers

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Speaker 1: have been you know, obviously self interested in producing profits

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Speaker 1: and producing size, but they have been constrained by not

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Speaker 1: causing systemic risk. Indeed, the PBOC called Evergrand onto the

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Speaker 1: carpet a couple of months ago and basically said, get

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Speaker 1: your dead and dead house in order, but at the

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Speaker 1: same time, don't cause systemic risk, which was I think

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Speaker 1: code for don't lower prices too much because it will

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Speaker 1: affect you know, how all the other developers are out there.

434
00:26:59,840 --> 00:27:02,439
Speaker 1: So why did it take so long? I think if

435
00:27:02,480 --> 00:27:05,880
Speaker 1: you look, the central government is not quite as all

436
00:27:06,080 --> 00:27:11,560
Speaker 1: powerful in terms of managing local business as people seem

437
00:27:11,600 --> 00:27:14,040
Speaker 1: to think it is. When it comes to really big

438
00:27:14,200 --> 00:27:18,000
Speaker 1: policy changes, Yeah, that's the permit of the of the

439
00:27:18,080 --> 00:27:23,200
Speaker 1: state Council and the party. When it comes to does

440
00:27:23,320 --> 00:27:26,119
Speaker 1: somebody buy this piece of land to somebody build a

441
00:27:26,160 --> 00:27:29,360
Speaker 1: project on this piece of land, will that cause excess

442
00:27:30,560 --> 00:27:34,240
Speaker 1: housing in that particular area. That's not the state council

443
00:27:34,320 --> 00:27:37,159
Speaker 1: coming down on that, that would be the local government.

444
00:27:37,200 --> 00:27:39,399
Speaker 1: But the problem is the local government is incentivized to

445
00:27:39,440 --> 00:27:41,320
Speaker 1: sell the land in the first place because that's how

446
00:27:41,359 --> 00:27:45,600
Speaker 1: they fund themselves. So really there's an entire ecosystem here.

447
00:27:46,160 --> 00:27:49,480
Speaker 1: You know, private private property ownership really didn't exist until

448
00:27:50,040 --> 00:27:54,080
Speaker 1: just over twenty years ago. And then there was a

449
00:27:54,680 --> 00:27:57,600
Speaker 1: new law which allowed a land management law which allowed

450
00:27:58,280 --> 00:28:02,800
Speaker 1: local governments to sell the land and transfer the land

451
00:28:03,600 --> 00:28:08,480
Speaker 1: usage rights to private parties, and that finally allowed them

452
00:28:08,640 --> 00:28:12,640
Speaker 1: to cover their budget definite because there's been a budget law.

453
00:28:13,280 --> 00:28:15,240
Speaker 1: In the run up to the Asia financial crisis, there's

454
00:28:15,240 --> 00:28:17,560
Speaker 1: been a budget law which required the local governments to

455
00:28:18,280 --> 00:28:21,439
Speaker 1: a balance their budgets but also not borrow money. From

456
00:28:21,520 --> 00:28:25,159
Speaker 1: external parties. So they had their hands tied, and so

457
00:28:25,280 --> 00:28:27,560
Speaker 1: when you had a the ability for them to sell,

458
00:28:27,640 --> 00:28:29,399
Speaker 1: they you know, they grabbed that with both hands and

459
00:28:29,440 --> 00:28:33,760
Speaker 1: they started selling. That's how they've been funding themselves ever since.

460
00:28:34,280 --> 00:28:37,600
Speaker 1: So you have the local governments in bed with the

461
00:28:37,760 --> 00:28:40,920
Speaker 1: real estate developers who are all kind of aligned with

462
00:28:41,000 --> 00:28:44,480
Speaker 1: seeing property prices go up because they own the land bank,

463
00:28:44,920 --> 00:28:47,200
Speaker 1: which they bought five years ago, and then all of

464
00:28:47,280 --> 00:28:50,880
Speaker 1: the populace. You know, that's their savings vehicle. Obviously they

465
00:28:50,920 --> 00:28:53,120
Speaker 1: want the value of that savings vehicle to go up.

466
00:28:53,720 --> 00:28:57,520
Speaker 1: So no one's really interested in seeing prices go down

467
00:28:57,640 --> 00:28:59,959
Speaker 1: except for those people who don't have real estate already,

468
00:29:00,360 --> 00:29:03,280
Speaker 1: but you know, whome ownership is relatively high. I think

469
00:29:03,360 --> 00:29:07,120
Speaker 1: that description of the sort of patchwork of incentives at

470
00:29:07,200 --> 00:29:11,440
Speaker 1: play is really really important and probably um an underappreciated

471
00:29:11,480 --> 00:29:13,560
Speaker 1: point when it comes to the way people think about

472
00:29:13,800 --> 00:29:16,600
Speaker 1: the Chinese government and the economy. Um. One thing I

473
00:29:16,640 --> 00:29:19,520
Speaker 1: wanted to ask you was, you know, on a related note,

474
00:29:19,560 --> 00:29:22,360
Speaker 1: and also just going back to the common prosperity point,

475
00:29:23,080 --> 00:29:27,160
Speaker 1: could you perhaps describe a little bit what China Evergrand's

476
00:29:27,200 --> 00:29:32,960
Speaker 1: relationship is with you know, the average retail investor or homeowner, like,

477
00:29:33,240 --> 00:29:38,360
Speaker 1: how exactly UM does the company interact with those types

478
00:29:38,440 --> 00:29:41,680
Speaker 1: of small creditors, because I think that that's probably going

479
00:29:41,800 --> 00:29:45,440
Speaker 1: to play into UM, you know, our next question, which

480
00:29:45,520 --> 00:29:48,920
Speaker 1: is going to be what are the chances of financial contagion?

481
00:29:49,160 --> 00:29:52,200
Speaker 1: And you know what might the endgame here actually look like?

482
00:29:53,880 --> 00:29:57,800
Speaker 1: Right you asked about the way that ever Grand funds itself,

483
00:29:58,120 --> 00:30:01,720
Speaker 1: and I think it's worthwhile thing king about that. Basically,

484
00:30:01,800 --> 00:30:02,920
Speaker 1: if you look at the if you look at the

485
00:30:02,960 --> 00:30:06,800
Speaker 1: balance sheet right now, the balance sheet is something like

486
00:30:07,720 --> 00:30:11,040
Speaker 1: twelve or thirteen billion dollars of unrestricted cash, it's about

487
00:30:12,560 --> 00:30:16,000
Speaker 1: billion dollars of receivables, and it's about two hundred billion

488
00:30:16,080 --> 00:30:19,920
Speaker 1: dollars of inventories. That's stuff which is work in progress

489
00:30:20,240 --> 00:30:23,240
Speaker 1: or stuff which has already been built. That's the assets side.

490
00:30:23,520 --> 00:30:29,120
Speaker 1: The liability side is something about nine billion dollars worth

491
00:30:29,200 --> 00:30:31,600
Speaker 1: of interest bearing debt, that is to say, you know,

492
00:30:31,840 --> 00:30:37,040
Speaker 1: US dollar bonds which foreign investors know about, or local

493
00:30:37,120 --> 00:30:40,840
Speaker 1: bond issuance under the local entities. And then there are

494
00:30:41,680 --> 00:30:46,120
Speaker 1: another call it hundred and eighty billion dollars worth of

495
00:30:46,600 --> 00:30:53,360
Speaker 1: on balance sheet supplier payables and contract liabilities. Those payables,

496
00:30:53,920 --> 00:30:57,080
Speaker 1: they are Depending on what what financial statement you're looking at,

497
00:30:57,120 --> 00:31:00,720
Speaker 1: there will either be trade payables or other or payables.

498
00:31:01,160 --> 00:31:06,080
Speaker 1: But embedded in that is a bunch of commercial acceptance bills,

499
00:31:06,120 --> 00:31:10,720
Speaker 1: which are basically commercial paper issued to the suppliers. The

500
00:31:10,840 --> 00:31:14,280
Speaker 1: suppliers then take it. It's probably got a three to

501
00:31:14,360 --> 00:31:17,120
Speaker 1: six month maturity, and if they really need the cash,

502
00:31:17,160 --> 00:31:18,920
Speaker 1: they'll go to a bank and say, buy my note

503
00:31:19,000 --> 00:31:21,360
Speaker 1: from me, and then the bank will charge a certain

504
00:31:21,440 --> 00:31:24,400
Speaker 1: interest rate on that. There's no interest paid on the

505
00:31:25,040 --> 00:31:27,960
Speaker 1: on the note itself, it's just a zero coupon note.

506
00:31:28,520 --> 00:31:32,160
Speaker 1: The company will then issue those notes also to people

507
00:31:32,200 --> 00:31:35,880
Speaker 1: who they owe money to, you know, for random reasons. Uh.

508
00:31:36,040 --> 00:31:39,680
Speaker 1: Sometimes they don't actually pay those off. And we saw

509
00:31:39,760 --> 00:31:45,240
Speaker 1: some situations here in July where the company paid off

510
00:31:45,360 --> 00:31:49,880
Speaker 1: some of its trade payables by delivering them apartments, big

511
00:31:49,960 --> 00:31:52,880
Speaker 1: swaths of apartments, and they deliver them, you know, you

512
00:31:52,920 --> 00:31:55,960
Speaker 1: call it discount to the market value of the apartment,

513
00:31:56,360 --> 00:31:59,560
Speaker 1: and then they let the the recipient of those apartments

514
00:31:59,800 --> 00:32:03,280
Speaker 1: go often do what they want, sell them or not

515
00:32:03,440 --> 00:32:05,800
Speaker 1: sell them. Sometimes they have a lock in. If you

516
00:32:05,920 --> 00:32:11,120
Speaker 1: look at that. Inside the debt portion, there are loans

517
00:32:12,280 --> 00:32:15,320
Speaker 1: and there are what we call trust loans. Some of

518
00:32:15,320 --> 00:32:17,480
Speaker 1: those trust loans are interest bearing, some of those trust

519
00:32:17,560 --> 00:32:20,920
Speaker 1: loans are non interest bearing, zero coupon assets. Some of

520
00:32:21,000 --> 00:32:26,920
Speaker 1: those are sold to trusts which are often they're called

521
00:32:27,000 --> 00:32:31,600
Speaker 1: wealth management products w n p s, and the w

522
00:32:31,800 --> 00:32:36,120
Speaker 1: MP manager will buy those inside a portfolio of a

523
00:32:36,200 --> 00:32:38,320
Speaker 1: whole bunch of debt issuers, and they will provide an

524
00:32:38,360 --> 00:32:42,240
Speaker 1: income stream. It's like, you know, a short to medium

525
00:32:42,320 --> 00:32:46,640
Speaker 1: term bond fund. Sometimes those commercial paper notes will be

526
00:32:46,840 --> 00:32:51,239
Speaker 1: sold to investors directly by a bank, and sometimes they

527
00:32:51,280 --> 00:32:56,160
Speaker 1: will be put into a business which ever Grand itself

528
00:32:56,280 --> 00:33:00,320
Speaker 1: set up. Ever Grands set up a financial entity which

529
00:33:00,520 --> 00:33:05,080
Speaker 1: was a wealth management product issuer, which meant that it

530
00:33:05,240 --> 00:33:08,880
Speaker 1: bought these these notes, and basically they ended up stuffing

531
00:33:08,880 --> 00:33:12,920
Speaker 1: a whole bunch of Evergrand notes into this entity. I

532
00:33:13,000 --> 00:33:15,640
Speaker 1: don't know what the waiting is. I have kind of

533
00:33:15,760 --> 00:33:19,920
Speaker 1: a creepy feeling that it's extraordinarily weighted towards ever Grand notes.

534
00:33:20,320 --> 00:33:24,200
Speaker 1: But they encouraged employees to buy them. They encouraged employees

535
00:33:24,280 --> 00:33:27,040
Speaker 1: families to buy them, contractors to buy them, etcetera. So

536
00:33:27,240 --> 00:33:29,480
Speaker 1: for example, they end up with the note, the note

537
00:33:29,520 --> 00:33:31,960
Speaker 1: gets paid to the contractor, then they go off to

538
00:33:32,000 --> 00:33:34,520
Speaker 1: the contractors say, please put your money that we just

539
00:33:34,720 --> 00:33:37,480
Speaker 1: paid you here, please invest in this other note here.

540
00:33:37,880 --> 00:33:41,080
Speaker 1: It yields, and there's a little bit of a pushing

541
00:33:41,080 --> 00:33:42,640
Speaker 1: and shoving to to see what they can do that.

542
00:33:43,280 --> 00:33:45,760
Speaker 1: So there's a there's a group of trust loans which

543
00:33:45,800 --> 00:33:49,760
Speaker 1: are in the wealth management products offered by ever Grand itself.

544
00:33:50,360 --> 00:33:53,680
Speaker 1: There is a group of the of these commercial paper

545
00:33:54,720 --> 00:33:58,360
Speaker 1: or commercial acceptance bills stuck in the wealth management products

546
00:33:58,480 --> 00:34:02,000
Speaker 1: offered by you know, intopend and asset managers. All told,

547
00:34:02,560 --> 00:34:07,600
Speaker 1: retail has exposure to Evergrand paper in a concentrated way

548
00:34:08,160 --> 00:34:12,320
Speaker 1: to something like forty to sixty billion RMB is what

549
00:34:12,440 --> 00:34:15,799
Speaker 1: I've read, uh, in terms of a non concentrated way,

550
00:34:15,880 --> 00:34:19,000
Speaker 1: it could be larger. So I saw I saw a

551
00:34:19,120 --> 00:34:21,680
Speaker 1: quote just you know, a couple of days ago suggesting

552
00:34:21,760 --> 00:34:25,200
Speaker 1: that the number of people invested in in Evergrand w

553
00:34:25,400 --> 00:34:34,200
Speaker 1: NPS with something like seventy people. It's a lot. M

554
00:34:47,120 --> 00:34:50,040
Speaker 1: Can you talk a little bit more about the protests

555
00:34:50,960 --> 00:34:52,839
Speaker 1: at the office is that we've seen. We see these

556
00:34:52,880 --> 00:34:55,200
Speaker 1: from time to time, these videos out of China, like

557
00:34:55,280 --> 00:34:57,600
Speaker 1: every few years, and sometimes it has to do with

558
00:34:58,239 --> 00:35:02,360
Speaker 1: our local real estate developer will be cutting prices on

559
00:35:02,640 --> 00:35:06,200
Speaker 1: some unsold properties, and people who recently bought the properties

560
00:35:06,200 --> 00:35:08,480
Speaker 1: are really upset because and you described that a few

561
00:35:08,520 --> 00:35:11,880
Speaker 1: minutes ago, how angry everyone gets at the thought of

562
00:35:12,120 --> 00:35:15,960
Speaker 1: property cuts, price cuts wheneveryone needs the prices to go up.

563
00:35:16,360 --> 00:35:19,919
Speaker 1: And then we're recording that September, I think earlier this week,

564
00:35:19,960 --> 00:35:23,239
Speaker 1: maybe on the thirteen, there are these videos of protests. Again,

565
00:35:23,680 --> 00:35:28,040
Speaker 1: who's protesting? What is the specific UH complaint or cause

566
00:35:28,080 --> 00:35:32,680
Speaker 1: of action this time. I've seen a few videos, and

567
00:35:33,040 --> 00:35:35,560
Speaker 1: I can really only go by what's in the news.

568
00:35:35,960 --> 00:35:39,680
Speaker 1: So just to just to cover that, UH. Some of

569
00:35:39,719 --> 00:35:43,920
Speaker 1: the protests appeared to be employees protesting that they hadn't

570
00:35:43,960 --> 00:35:48,759
Speaker 1: been paid. There were protests today suggesting that UH some

571
00:35:48,960 --> 00:35:54,360
Speaker 1: suppliers were looking to get paid. Protests yesterday were I

572
00:35:54,560 --> 00:35:59,799
Speaker 1: think about Trust product buyers demanding their money back. There

573
00:35:59,800 --> 00:36:04,279
Speaker 1: had been UH an announcement by the company to its

574
00:36:04,560 --> 00:36:07,480
Speaker 1: product buyers that they would seek to restructure the payment

575
00:36:07,640 --> 00:36:10,560
Speaker 1: so you would get for a hundred cents on the dollar,

576
00:36:10,600 --> 00:36:14,759
Speaker 1: you'd get you know, ten cents soon, and then you'd

577
00:36:14,800 --> 00:36:17,680
Speaker 1: get ten cents every quarter for the next ten quarters,

578
00:36:18,520 --> 00:36:23,080
Speaker 1: and if you wanted to, you could instead receive an

579
00:36:23,120 --> 00:36:27,520
Speaker 1: apartment at discount, or you could receive a parking space

580
00:36:27,600 --> 00:36:31,239
Speaker 1: at discount to the market value of the apartment or

581
00:36:31,280 --> 00:36:34,839
Speaker 1: the parking space that wasn't received well. Basically, people are saying,

582
00:36:34,880 --> 00:36:36,440
Speaker 1: you know, well, you can promise you have pay me

583
00:36:36,480 --> 00:36:38,920
Speaker 1: a hundred dollars and for two and a half years here,

584
00:36:39,000 --> 00:36:41,040
Speaker 1: but you know what if you go bankrupt later this year,

585
00:36:41,280 --> 00:36:44,200
Speaker 1: I want my money now. And that seems to be

586
00:36:45,360 --> 00:36:48,600
Speaker 1: a sentiment which is increasing. There was situations at the

587
00:36:48,719 --> 00:36:52,200
Speaker 1: end of August, I believe where a couple of institutional

588
00:36:52,280 --> 00:36:56,879
Speaker 1: trust managers who had been told that ever Grant wasn't

589
00:36:56,920 --> 00:36:59,040
Speaker 1: going to be able to pay off all the money

590
00:36:59,120 --> 00:37:01,680
Speaker 1: at the maturity of paper. They said, I want my

591
00:37:01,760 --> 00:37:04,799
Speaker 1: money back, and every grand said, well, you know, I'm

592
00:37:04,840 --> 00:37:07,200
Speaker 1: going to have to delay you. Let's have a mutually

593
00:37:07,239 --> 00:37:10,759
Speaker 1: agreed result on this, and the trusts said, you know,

594
00:37:10,840 --> 00:37:13,239
Speaker 1: I want my money back. There have been companies who

595
00:37:13,280 --> 00:37:16,120
Speaker 1: have said that, there have been contractors who say that,

596
00:37:17,160 --> 00:37:21,000
Speaker 1: there are individuals who say that, I think the more

597
00:37:21,120 --> 00:37:23,799
Speaker 1: that this gets in the paper locally, and the more

598
00:37:23,880 --> 00:37:27,880
Speaker 1: that it passes around you know, Chinese social media, the

599
00:37:28,040 --> 00:37:31,600
Speaker 1: more that it happens, and the more likely they're going

600
00:37:31,680 --> 00:37:37,000
Speaker 1: to be either planned or spontaneous eruptions of displeasure. I

601
00:37:37,080 --> 00:37:40,160
Speaker 1: think when you when people have a very large portion

602
00:37:40,239 --> 00:37:42,960
Speaker 1: of their savings on the line and they can see

603
00:37:43,040 --> 00:37:44,960
Speaker 1: the rest of the market not having a good time

604
00:37:45,040 --> 00:37:47,480
Speaker 1: of it. You know, a property prices declining and declining,

605
00:37:47,680 --> 00:37:50,960
Speaker 1: every Grand offering ever bigger discounts month by month. Those

606
00:37:51,000 --> 00:37:53,520
Speaker 1: people who are already invested, that is to say, they've

607
00:37:53,560 --> 00:37:56,000
Speaker 1: already put down a deposit, they've already taken a mortgage,

608
00:37:56,040 --> 00:38:00,680
Speaker 1: they've signed a pre sale contract. They just want to

609
00:38:00,800 --> 00:38:03,560
Speaker 1: be sure to get what they paid for. They worked

610
00:38:03,560 --> 00:38:05,839
Speaker 1: a long time, they went into debt, they borrowed money

611
00:38:05,880 --> 00:38:08,920
Speaker 1: from friends and family, and now they have their thing,

612
00:38:09,080 --> 00:38:12,400
Speaker 1: and suddenly Evergrand is threatening them with the loss of

613
00:38:12,480 --> 00:38:15,560
Speaker 1: their life savings. I think that that's that kind of

614
00:38:15,680 --> 00:38:20,560
Speaker 1: sentiment is not shall we say unworthy. People invest in

615
00:38:20,760 --> 00:38:24,760
Speaker 1: in what produces a return. And when the Evergrand notes

616
00:38:24,840 --> 00:38:28,880
Speaker 1: were returning, ten people put the money in because obviously,

617
00:38:29,080 --> 00:38:32,479
Speaker 1: you know, Evergrand is a big safe company, because well

618
00:38:32,920 --> 00:38:36,160
Speaker 1: they are you know, housing in Guangzo. And I think

619
00:38:36,480 --> 00:38:38,719
Speaker 1: this is a delicate This is a delicate situation here

620
00:38:38,760 --> 00:38:42,160
Speaker 1: where the government has to figure out who they're going

621
00:38:42,200 --> 00:38:44,279
Speaker 1: to play nice with and who they're going to play

622
00:38:44,400 --> 00:38:50,160
Speaker 1: less nice with. What's the possibility for wider contagion here

623
00:38:50,320 --> 00:38:54,040
Speaker 1: that the troubles at ever Grand start reverberating through the

624
00:38:54,120 --> 00:38:58,680
Speaker 1: financial system, you know, potentially start affecting other real estate companies.

625
00:38:59,120 --> 00:39:01,720
Speaker 1: You've done a great job of describing the funding mix,

626
00:39:01,920 --> 00:39:04,440
Speaker 1: and my understanding of it is a lot of the

627
00:39:04,800 --> 00:39:10,000
Speaker 1: domestic stuff seems to be somewhat secured, a lot of

628
00:39:10,040 --> 00:39:12,200
Speaker 1: the offshore stuff, you know, maybe there's more of a

629
00:39:12,320 --> 00:39:16,560
Speaker 1: question mark around it. But where exactly could we see

630
00:39:17,239 --> 00:39:22,720
Speaker 1: Evergrand troubles morphing into wider pressure points on the Chinese economy.

631
00:39:24,040 --> 00:39:26,239
Speaker 1: That's a good question. As I mentioned before, there's a

632
00:39:27,120 --> 00:39:31,800
Speaker 1: there is an underlying context here where the government is

633
00:39:32,400 --> 00:39:35,520
Speaker 1: trying to, shall we say, slow down real estate speculation,

634
00:39:36,280 --> 00:39:42,000
Speaker 1: and that affects everybody, including ever Grant. But let's imagine

635
00:39:42,040 --> 00:39:44,600
Speaker 1: every Grand will be were to be saved. Someone comes

636
00:39:44,719 --> 00:39:47,120
Speaker 1: up and and says, hey, ever Grand, you've discovered the

637
00:39:47,120 --> 00:39:51,200
Speaker 1: cure for cancer. Well, that doesn't absolve all the other

638
00:39:51,280 --> 00:39:55,279
Speaker 1: companies in the in the industry from their collective sin,

639
00:39:55,400 --> 00:39:58,480
Speaker 1: shall we say, over the past decade. I think that

640
00:39:59,120 --> 00:40:03,719
Speaker 1: the two parts here are how much of this situation

641
00:40:03,960 --> 00:40:07,200
Speaker 1: is driven by the market itself and how much of

642
00:40:07,239 --> 00:40:10,320
Speaker 1: it is driven by contagion from ever Grant. There is

643
00:40:10,440 --> 00:40:14,360
Speaker 1: obviously some contagion. You can see this in the offshore

644
00:40:14,440 --> 00:40:18,280
Speaker 1: high high yield bond market. Once ever Grand started tanking,

645
00:40:18,480 --> 00:40:20,480
Speaker 1: a whole bunch of the other one started tanking because

646
00:40:20,520 --> 00:40:24,520
Speaker 1: people needed to start selling their exposure, their Chinese high

647
00:40:24,560 --> 00:40:27,759
Speaker 1: yield bond exposure, and developers make up a very large

648
00:40:27,800 --> 00:40:31,880
Speaker 1: portion of any portfolio. If you look at what van

649
00:40:31,960 --> 00:40:36,839
Speaker 1: Ki said in their comments in July after the first half,

650
00:40:37,360 --> 00:40:41,400
Speaker 1: it was very clear that that they had expectations of

651
00:40:41,600 --> 00:40:44,920
Speaker 1: weaker second half. They said, the first half was week,

652
00:40:45,000 --> 00:40:47,320
Speaker 1: the second half is going to be weaker, and we

653
00:40:47,480 --> 00:40:49,880
Speaker 1: really don't know where it's going to end up. And

654
00:40:50,440 --> 00:40:53,800
Speaker 1: you know, the development business is not a great business anymore.

655
00:40:54,200 --> 00:40:56,320
Speaker 1: And that's a little bit interesting because Vankie had you know,

656
00:40:56,960 --> 00:40:59,080
Speaker 1: gone a little bit unfocused a few years ago and

657
00:40:59,120 --> 00:41:02,600
Speaker 1: then refocused on the development business. And now they're finally saying,

658
00:41:02,640 --> 00:41:04,759
Speaker 1: you know, we need to we need to broaden our

659
00:41:05,280 --> 00:41:07,800
Speaker 1: our income stream. Here is that there's more fee based

660
00:41:07,880 --> 00:41:12,600
Speaker 1: and less development base. I think that the entire industry

661
00:41:12,719 --> 00:41:16,160
Speaker 1: is facing a slowdown. Here, the debt was taken in

662
00:41:16,239 --> 00:41:18,080
Speaker 1: the good times, and now the debt has to be

663
00:41:18,160 --> 00:41:22,280
Speaker 1: paid in the in the slower times. That hurts everybody

664
00:41:22,680 --> 00:41:26,200
Speaker 1: in terms of contagion. I think there's a the analogy

665
00:41:26,320 --> 00:41:30,200
Speaker 1: that I would look at here is the pizzeria. The

666
00:41:30,280 --> 00:41:33,040
Speaker 1: pizzeria goes bust, but that doesn't stop the people from

667
00:41:33,080 --> 00:41:36,000
Speaker 1: eating pizza. You know, the workers at the pizzeria are

668
00:41:36,000 --> 00:41:38,000
Speaker 1: going to go find another pizzeria to work in. Maybe

669
00:41:38,000 --> 00:41:40,160
Speaker 1: the owner will go, you know, borrow some money and

670
00:41:40,160 --> 00:41:43,400
Speaker 1: start another pizzeria, but the people will have their pizza.

671
00:41:44,120 --> 00:41:46,759
Speaker 1: The troubles that ever Grand is running into here are

672
00:41:47,120 --> 00:41:50,040
Speaker 1: somewhat ever Grand specific. They're very highly levered. But there's

673
00:41:50,080 --> 00:41:56,400
Speaker 1: also an underlying context of government suppressing land price growth

674
00:41:56,600 --> 00:42:00,960
Speaker 1: and suppressing real estate speculation. And know there's some aspect

675
00:42:01,000 --> 00:42:04,960
Speaker 1: of of people being full. You know, they've built a

676
00:42:05,000 --> 00:42:07,640
Speaker 1: lot of property, and if you build a little bit

677
00:42:07,680 --> 00:42:10,240
Speaker 1: too much too quickly, it takes a little while to digest.

678
00:42:10,320 --> 00:42:13,200
Speaker 1: And if you have the magic moment here where policy

679
00:42:13,239 --> 00:42:17,880
Speaker 1: pressure comes down and debt pressure is up and financing

680
00:42:17,920 --> 00:42:21,680
Speaker 1: pressure is immense, you could see, you know, some pizzeria

681
00:42:21,760 --> 00:42:26,520
Speaker 1: is going bust. So I love the pizzeria analogy, by

682
00:42:26,520 --> 00:42:29,400
Speaker 1: the way, UM, But one of the big questions that

683
00:42:29,480 --> 00:42:32,200
Speaker 1: the market seems to be focusing on right now is

684
00:42:32,360 --> 00:42:37,120
Speaker 1: what happens in a restructuring scenario. So ostensibly you have

685
00:42:37,480 --> 00:42:41,960
Speaker 1: creditors of different seniority who will get owed money, you know,

686
00:42:42,320 --> 00:42:46,960
Speaker 1: before other creditors of other types of seniority. But on

687
00:42:47,120 --> 00:42:50,319
Speaker 1: the other hand, you know you've laid out perfectly how

688
00:42:50,760 --> 00:42:54,040
Speaker 1: politically sensitive a lot of this is. And I can't

689
00:42:54,120 --> 00:42:57,720
Speaker 1: imagine that the Chinese authorities would be happy, for instance,

690
00:42:57,760 --> 00:43:01,200
Speaker 1: to see um a bunch of banks paid back before

691
00:43:01,560 --> 00:43:07,680
Speaker 1: retail investors who are currently protesting outside of ever grand offices. Yeah,

692
00:43:07,719 --> 00:43:10,920
Speaker 1: that's a it's a good question, and obviously everything everything

693
00:43:11,520 --> 00:43:15,520
Speaker 1: is in flux. However, I think that if you start

694
00:43:15,600 --> 00:43:19,520
Speaker 1: from the ranking of who ends up coming out well

695
00:43:19,880 --> 00:43:24,080
Speaker 1: on this, if you had to ask the Communist Party

696
00:43:24,680 --> 00:43:30,080
Speaker 1: of China, who's the most important stakeholder in this, obviously

697
00:43:30,160 --> 00:43:32,359
Speaker 1: it's the Communist Party of China. There there one number one.

698
00:43:32,680 --> 00:43:35,480
Speaker 1: The second one is going to be the perspective homeowners,

699
00:43:35,560 --> 00:43:39,480
Speaker 1: which number one point to to one point five million people,

700
00:43:39,600 --> 00:43:42,680
Speaker 1: depending on who you ask. They have deposits or they

701
00:43:42,719 --> 00:43:46,880
Speaker 1: have mortgage and they're waiting for delivery of their product

702
00:43:47,000 --> 00:43:51,239
Speaker 1: from Evergrand. I think third in the list would be

703
00:43:52,120 --> 00:43:55,480
Speaker 1: the hundred and sixty thousand plus workers who get paid

704
00:43:55,840 --> 00:43:59,680
Speaker 1: and the hundreds of thousands of other workers who are

705
00:44:00,040 --> 00:44:03,279
Speaker 1: tractors to the projects. These are the piece of reemployees.

706
00:44:03,960 --> 00:44:09,120
Speaker 1: Inside there, somewhere, there's probably a ranking of people who

707
00:44:09,200 --> 00:44:12,120
Speaker 1: have already done the work and are waiting to get paid.

708
00:44:13,360 --> 00:44:16,120
Speaker 1: You know, the contractors who are not in line to

709
00:44:16,160 --> 00:44:18,719
Speaker 1: do another contract, but they already did the work and

710
00:44:18,840 --> 00:44:20,600
Speaker 1: they've been waiting to get paid for six months and

711
00:44:20,640 --> 00:44:23,640
Speaker 1: they still haven't been paid. Uh, they should be paid already.

712
00:44:24,440 --> 00:44:26,839
Speaker 1: You you end up with the people. Shall we say

713
00:44:27,440 --> 00:44:30,160
Speaker 1: at the top of the list below that you end

714
00:44:30,280 --> 00:44:34,399
Speaker 1: up with investors. I think in onshore of a grand debt,

715
00:44:35,080 --> 00:44:37,120
Speaker 1: those would be the banks and the trust products. And

716
00:44:37,160 --> 00:44:39,480
Speaker 1: the question is do any of those get a haircut?

717
00:44:39,600 --> 00:44:42,320
Speaker 1: And the answer I think is, and this is just

718
00:44:42,480 --> 00:44:46,520
Speaker 1: my opinion, but I think that everybody takes a haircut.

719
00:44:47,080 --> 00:44:51,279
Speaker 1: I think that haircut gets delivered through delay, but it

720
00:44:51,320 --> 00:44:53,440
Speaker 1: could also get delivered through an option you have a

721
00:44:53,560 --> 00:44:56,400
Speaker 1: chance to get. You get call it seventy cents on

722
00:44:56,440 --> 00:44:58,960
Speaker 1: the dollar. Now, or you get a hundred cents on

723
00:44:59,000 --> 00:45:02,799
Speaker 1: the dollar PLU two interest rate if you take ten

724
00:45:03,200 --> 00:45:05,799
Speaker 1: each quarter for the next ten quarters. And obviously those

725
00:45:05,800 --> 00:45:10,160
Speaker 1: percentages can change. In terms of the question about offshore

726
00:45:10,280 --> 00:45:14,680
Speaker 1: bond holders and equity holders in the company, oh boy,

727
00:45:15,120 --> 00:45:19,400
Speaker 1: that's a really good question and one where I recommend

728
00:45:19,480 --> 00:45:21,680
Speaker 1: not being long. Let's put it that way. I think

729
00:45:21,800 --> 00:45:25,040
Speaker 1: the issue here is that there are layers of seniority,

730
00:45:25,160 --> 00:45:28,400
Speaker 1: even above the ones which are obvious. Evergrand owns a

731
00:45:28,480 --> 00:45:31,960
Speaker 1: bunch of assets like its subsidiaries ever Grand Property Services

732
00:45:32,000 --> 00:45:37,400
Speaker 1: and Evergrand Auto and fun Chibowl, which is the the SCB,

733
00:45:37,560 --> 00:45:40,480
Speaker 1: which is the online marketplace, which is said to be

734
00:45:40,520 --> 00:45:43,359
Speaker 1: worth something like twenty billion dollars. They've got a bunch

735
00:45:43,400 --> 00:45:46,000
Speaker 1: of assets sitting on the Evergrand side. And then they

736
00:45:46,040 --> 00:45:49,000
Speaker 1: also own six of the real estate operations which are

737
00:45:49,080 --> 00:45:56,840
Speaker 1: on shore. Those that that company owns several hundred companies,

738
00:45:57,400 --> 00:46:01,160
Speaker 1: you know, somewhere between five hundred and a thousand actual subsidiaries,

739
00:46:01,200 --> 00:46:03,440
Speaker 1: plus equity interests in a whole bunch more which they

740
00:46:03,440 --> 00:46:08,640
Speaker 1: don't break out. And every one of those companies downstream

741
00:46:08,760 --> 00:46:11,880
Speaker 1: owns a project or operates a project, and that project

742
00:46:11,960 --> 00:46:15,000
Speaker 1: has an asset, and it probably has a liability and

743
00:46:15,080 --> 00:46:18,640
Speaker 1: has bank debt. Local bank lends against the real estate

744
00:46:18,680 --> 00:46:22,000
Speaker 1: which is inside that little project company. If push comes

745
00:46:22,080 --> 00:46:26,080
Speaker 1: to shove, that guy gets paid first, that bank gets paid,

746
00:46:26,480 --> 00:46:28,839
Speaker 1: then the project guys get paid, and then if there's

747
00:46:28,920 --> 00:46:32,080
Speaker 1: anything left over from that project, then the equity gets

748
00:46:32,120 --> 00:46:34,960
Speaker 1: paid up the hill to Hanga, and then that goes

749
00:46:35,040 --> 00:46:36,719
Speaker 1: to pay off all the debt which is at the

750
00:46:36,760 --> 00:46:40,960
Speaker 1: HUNGDA level, which is not secured against assets. Then if

751
00:46:40,960 --> 00:46:43,480
Speaker 1: there's anything left over, that goes to the shareholders of

752
00:46:43,600 --> 00:46:47,560
Speaker 1: hung Da, of which ever Grand is Now some of

753
00:46:47,640 --> 00:46:50,200
Speaker 1: that may end up flowing up, but may not. And

754
00:46:50,280 --> 00:46:53,919
Speaker 1: then ever Grand itself has a bunch of offshore debt

755
00:46:54,160 --> 00:46:57,120
Speaker 1: plus it's equity. Now, if we go back to that,

756
00:46:57,360 --> 00:47:00,319
Speaker 1: that that matrix, or that that ranking of people who

757
00:47:00,880 --> 00:47:04,360
Speaker 1: need to get paid, my gut says that the offshore

758
00:47:04,400 --> 00:47:08,400
Speaker 1: bond holders are probably in the worst spot the offshore

759
00:47:08,440 --> 00:47:12,279
Speaker 1: equity holders is a question. And I'm going to put

760
00:47:12,360 --> 00:47:16,360
Speaker 1: that in a way which maybe is not very politic,

761
00:47:16,960 --> 00:47:23,640
Speaker 1: but it's very rare to see insiders and founders, especially

762
00:47:23,719 --> 00:47:27,960
Speaker 1: those who are politically connected, losing their steak in a restructuring.

763
00:47:28,640 --> 00:47:31,919
Speaker 1: So if you look at the Kaiser restructuring several years ago,

764
00:47:32,120 --> 00:47:34,520
Speaker 1: but also in the real estate sector, they tried to

765
00:47:34,600 --> 00:47:37,360
Speaker 1: cram down bond holders. Eventually the bond holders got paid,

766
00:47:37,760 --> 00:47:41,280
Speaker 1: but they really tried to make the offshore bond holders suffer.

767
00:47:41,880 --> 00:47:45,279
Speaker 1: But the founder didn't lose his steak. And if you

768
00:47:45,320 --> 00:47:48,839
Speaker 1: look at some of the other equity situations where there

769
00:47:48,920 --> 00:47:51,400
Speaker 1: has been there has been a restructuring, but there has

770
00:47:51,440 --> 00:47:56,200
Speaker 1: been no complete bankruptcy, been a managed or organized restructuring,

771
00:47:57,160 --> 00:48:00,640
Speaker 1: it's not clear that the equity holders lose. And you know,

772
00:48:00,920 --> 00:48:05,279
Speaker 1: the shareannais is politically connected. He was the wealthiest man

773
00:48:05,320 --> 00:48:09,239
Speaker 1: in China. He was on the DAIS at the hundredth anniversary.

774
00:48:09,360 --> 00:48:11,960
Speaker 1: He's a member, i believe, of the People's Consultative Conference.

775
00:48:12,719 --> 00:48:15,440
Speaker 1: He's a tough man to to knock down, I think.

776
00:48:15,880 --> 00:48:18,719
Speaker 1: And plus he owned sent of the company. If there

777
00:48:18,760 --> 00:48:21,640
Speaker 1: was a restructuring, you might find that the equity in

778
00:48:21,760 --> 00:48:25,200
Speaker 1: the restructuring, he was given a chance to redeem himself

779
00:48:25,239 --> 00:48:29,239
Speaker 1: through sweat equity, perhaps a little bit like the the

780
00:48:29,600 --> 00:48:35,000
Speaker 1: managers at Noble Group, which effectively forced a restructuring on

781
00:48:35,040 --> 00:48:38,000
Speaker 1: their bond holders, and you know they got some equity,

782
00:48:38,080 --> 00:48:41,440
Speaker 1: but management ended up. I think taking of the company

783
00:48:42,200 --> 00:48:45,160
Speaker 1: out of that, you could see a situation where the

784
00:48:45,880 --> 00:48:50,719
Speaker 1: equity holders who have insidership are not damaged as much

785
00:48:50,800 --> 00:48:54,239
Speaker 1: as equity holders who don't have insidership. So I think

786
00:48:54,280 --> 00:48:57,239
Speaker 1: it's the people at the top where. You know, if

787
00:48:57,280 --> 00:49:00,440
Speaker 1: you asked a hundred thousand average China, these people on

788
00:49:00,480 --> 00:49:03,359
Speaker 1: the street, what do you think is fair? I think

789
00:49:03,480 --> 00:49:05,840
Speaker 1: if you take their answers, that would be a pretty

790
00:49:05,880 --> 00:49:09,240
Speaker 1: good a pretty good indication of who should get paid first.

791
00:49:09,960 --> 00:49:12,840
Speaker 1: And obviously that means that four nequity holders and foreign

792
00:49:12,880 --> 00:49:17,920
Speaker 1: bond holders are at the bottom of that list. Well, Travis, um,

793
00:49:18,160 --> 00:49:22,160
Speaker 1: you've laid out a really complicated issue very very well.

794
00:49:22,280 --> 00:49:24,879
Speaker 1: So thank you so much for coming on all loots. Yeah,

795
00:49:24,880 --> 00:49:27,360
Speaker 1: I'm glad. I'm glad we can finally finally get you

796
00:49:27,480 --> 00:49:30,799
Speaker 1: on to talk about progrund Nova's So thank you so much.

797
00:49:31,080 --> 00:49:35,680
Speaker 1: It's been my privilege. Thanks Travis. Thanks Travis that much.

798
00:49:35,760 --> 00:49:50,480
Speaker 1: Great So, Joe I really enjoyed that conversation. And again,

799
00:49:50,640 --> 00:49:53,480
Speaker 1: one of the very interesting things about China everground is

800
00:49:53,520 --> 00:49:57,040
Speaker 1: people have been warning of weaknesses in its business model

801
00:49:57,160 --> 00:50:01,480
Speaker 1: for a long time, and it seemed like everyone just

802
00:50:01,640 --> 00:50:03,200
Speaker 1: kind of looked through them. You know, it was this

803
00:50:03,280 --> 00:50:06,520
Speaker 1: idea that China can just keep rolling over debt indefinitely,

804
00:50:07,000 --> 00:50:11,919
Speaker 1: and then finally they seem to be actually coming into

805
00:50:12,000 --> 00:50:14,560
Speaker 1: the four and everyone's paying attention to them now. So

806
00:50:14,680 --> 00:50:17,560
Speaker 1: that's point one. The other thing that I thought was

807
00:50:17,680 --> 00:50:20,720
Speaker 1: very very interesting or very relevant was the way Travis

808
00:50:20,840 --> 00:50:24,080
Speaker 1: laid out the importance of real estate not just to

809
00:50:24,160 --> 00:50:30,200
Speaker 1: the Chinese economy but basically to society, right right. That

810
00:50:30,400 --> 00:50:33,319
Speaker 1: was really interesting. That's just sort of like this society

811
00:50:33,400 --> 00:50:37,440
Speaker 1: wide need to have real estate prices go up. And

812
00:50:37,480 --> 00:50:40,080
Speaker 1: I also thought it was interesting too to see some

813
00:50:40,239 --> 00:50:42,759
Speaker 1: of the tension, and he talked about it, but at

814
00:50:42,800 --> 00:50:45,040
Speaker 1: the end, in response to your question, some of the

815
00:50:45,120 --> 00:50:49,680
Speaker 1: tension that emerges between the formal seniority of the capital

816
00:50:49,760 --> 00:50:54,480
Speaker 1: structure versus the political realities of capital structure. And so,

817
00:50:54,800 --> 00:50:58,360
Speaker 1: you know, you think like a traditional bank, like depositors

818
00:50:58,600 --> 00:51:02,920
Speaker 1: at a bank are typically the last to get a haircut, right,

819
00:51:03,000 --> 00:51:05,719
Speaker 1: you know, it's like you do everything you can, the

820
00:51:05,800 --> 00:51:08,719
Speaker 1: bond holders get hit, the stockholders get hit. Only in

821
00:51:08,840 --> 00:51:13,160
Speaker 1: the most extreme situations do you hit people who are

822
00:51:13,200 --> 00:51:16,560
Speaker 1: sort of like retail depositors or customers. But when you

823
00:51:16,680 --> 00:51:20,440
Speaker 1: have entities that are as complicated as a real estate company,

824
00:51:20,520 --> 00:51:23,080
Speaker 1: and you have employees that are getting paid in wealth

825
00:51:23,160 --> 00:51:26,839
Speaker 1: management products and customers who own a house and part

826
00:51:26,880 --> 00:51:29,440
Speaker 1: of their expectation or part of the purchase of the

827
00:51:29,520 --> 00:51:32,719
Speaker 1: house is the assumption that home prices only go up.

828
00:51:33,120 --> 00:51:34,920
Speaker 1: You can start to see where you have this sort

829
00:51:34,960 --> 00:51:39,320
Speaker 1: of bifurcation, so to speak, between formal capital structure, seniority,

830
00:51:39,440 --> 00:51:42,000
Speaker 1: and what people think is like right and just. And

831
00:51:42,080 --> 00:51:43,719
Speaker 1: I feel like a lot of the tensions that we're

832
00:51:43,719 --> 00:51:47,719
Speaker 1: seeing with Everground have to do with sort of this

833
00:51:48,120 --> 00:51:51,640
Speaker 1: this divergence totally. And I would say there are still

834
00:51:51,760 --> 00:51:55,319
Speaker 1: so many unanswered questions swirling around Everground, and no one

835
00:51:55,400 --> 00:51:57,800
Speaker 1: really knows what's going to happen. But one thing I

836
00:51:57,840 --> 00:52:00,440
Speaker 1: would say with some certainty is that if there is

837
00:52:00,520 --> 00:52:04,160
Speaker 1: a restructuring, it's going to be a really interesting and

838
00:52:04,280 --> 00:52:08,680
Speaker 1: probably intense workout process in terms of who gets what haircut.

839
00:52:09,320 --> 00:52:12,160
Speaker 1: The one other thing I would say is, I'm just

840
00:52:12,239 --> 00:52:16,560
Speaker 1: thinking about China trying to rebalance its real estate sector

841
00:52:16,719 --> 00:52:20,160
Speaker 1: overall and bring down leverage and you know, try to

842
00:52:20,560 --> 00:52:24,920
Speaker 1: de risk the overall industry. And I'm thinking again back

843
00:52:24,960 --> 00:52:27,080
Speaker 1: to that point about housing being such a big part

844
00:52:27,120 --> 00:52:31,080
Speaker 1: of the economy and society, and in many ways, the

845
00:52:31,200 --> 00:52:35,840
Speaker 1: Chinese government has incentivized home ownership as a place for

846
00:52:35,960 --> 00:52:38,200
Speaker 1: people to put their money. I mean, in China there

847
00:52:38,239 --> 00:52:42,000
Speaker 1: are capital controls, so people have limited places. You can

848
00:52:42,040 --> 00:52:45,080
Speaker 1: put it in stocks, um, but you know those are

849
00:52:45,080 --> 00:52:47,600
Speaker 1: pretty volatile. You can put it in wealth management products,

850
00:52:47,680 --> 00:52:50,160
Speaker 1: but the government doesn't really want you to do that anymore.

851
00:52:50,760 --> 00:52:53,120
Speaker 1: Or you can buy a house, and now that seems

852
00:52:53,160 --> 00:52:56,400
Speaker 1: to be in doubt. So I'm wondering where will that

853
00:52:56,680 --> 00:53:00,080
Speaker 1: excess uh ball of money kind of roll in to

854
00:53:00,360 --> 00:53:03,759
Speaker 1: next if if that outlet gets cut off or put

855
00:53:03,880 --> 00:53:06,040
Speaker 1: in doubt, right, and then it gets to all kinds

856
00:53:06,080 --> 00:53:08,719
Speaker 1: of questions that you know, we could have like Matt

857
00:53:08,840 --> 00:53:11,320
Speaker 1: Klein or something, or Michael Pettis back out of the

858
00:53:11,320 --> 00:53:15,400
Speaker 1: show and talk about, you know, uh, financial oppression of

859
00:53:15,520 --> 00:53:18,440
Speaker 1: workers and households and the lack of income they get

860
00:53:18,640 --> 00:53:22,680
Speaker 1: the way this forces them to engage in speculation as

861
00:53:22,719 --> 00:53:25,640
Speaker 1: a matter of course because they don't get enough from income.

862
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Speaker 1: So all of these things seemed to stem from prior

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Speaker 1: policies that had some other goal, and evergrand seems like

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Speaker 1: a particularly florid um florid result of many, many economic

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Speaker 1: decisions that came before it. Florid result is a good description.

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Speaker 1: I like that. Thank you, thank you. Okay, shall we

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Speaker 1: leave it there? Yeah, let's leave it there. All right.

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Speaker 1: This has been another episode of the All Thoughts Podcast.

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Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at

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Speaker 1: Tracy Alloway and I'm Joe Why Isn't All? You can

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00:54:00,000 --> 00:54:03,359
Speaker 1: follow me on Twitter at the Stalwart. Follow our guest

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00:54:03,440 --> 00:54:07,879
Speaker 1: on Twitter, Travis Lundy. He's at Travis Lundy Asia. Follow

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Speaker 1: our producer Laura Carlson. She's at Laura M. Carlson. Follow

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00:54:11,840 --> 00:54:15,400
Speaker 1: the Bloomberg head of podcast, Francesco Levi at Francesca Today,

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00:54:15,800 --> 00:54:18,799
Speaker 1: and check out all of our podcast at Bloomberg under

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Speaker 1: the handle at podcasts. Thanks for listening.