Vicious Rants of an Angry Yellow Man

 Woke up this morning with the news that the Dow is down more than 600 points.  The main reason being that the Chinese giant real estate company Evergrande maybe defaulting on its debts.  This sends shock waves through the financial world.  But I don't think this will trigger a 2008 like financial crisis in China and spread to the rest of the world.

Real estate companies like Evergrande have been rising in China for couple of decades.  With a rising middle class and constant stream of people moving from rural to urban areas to work, building of houses and apartments were going at neck breaking pace in China.  With money to invest but not a great deal of confidence in the Chinese stock market, the people were putting their money in real estate.  Some people were buying two or three apartments, putting down money before the apartments were built.  Sometimes their life savings were invested in buildings that were still on the drawing board.

Evergrande was doing great in real estate but was branching out to other businesses.  They own the biggest soccer team in the country, building the biggest soccer stadium, investing in pig farms, bottled water, solar energy etc.  They accumulated a lot of debt.  The real estate surge in china has slowed.  Most people who were going to move to urban areas have already done so.  There is a very low birth rate in China which may not change in the future.  So the confidence of people and the banks on Evergrande has decreased.  

Evergrande, which is listed in the Hong Kong Exchange, has seen its price gone down almost 90% in recent months.  This has the effect of bringing down other real estates companies in China.  This in turn affect foreign investors who have positions in these companies.  The idea that a large Chinese company would default scares the rest of the world.  They have always said that when America sneezes, the rest of world gets a cold.  This applies to China today as well.

I think ultimately Evergrande won't go out of business completely.  It has property assets it can sell.  China will help in some way although not necessary a direct bailout.  It may push banks to lower the interests that Evergrande is due to pay.  Evergrande, like many U.S. companies in 2008, may be too big to fail.  China has been wheeling in some companies who have made big money but were taking more risks.  This will make China put on brakes on some capitalistic practices that have made money for China.  Regulations are sure to follow.  The regulations will be much more strict than those the U.S. put in after 2008.  They will be even more restrict than Elizabeth Warren wanted!