π¨π¨ 1. Evergrande thread since its liquidity crisis which has been playing out for over a year seems to be quickly accelerating and why it matters ππ
2. Evergrande is the largest property developer in China, has been caught in a debt spiral for years and seems finally on the edge of insolvency.
3. It has US$107b of "debt" on B/S as of 12/31 with half due this year. But this dramatically understates its obligations. Add $80bn of commercial paper (some may overlap with the B/S debt). Add $90bn of stretched A/P. Add construction capex for presold apts. Add off B/S debt
4. A critical source of funding for prop developers is pre-sale of units (selling apts before they are built). Pre-sales "should" be escrowed, but of course they are not, and have been used to fund ongoing operations and repay debts
5. Evergrande has been offering "steep discounts" since last there for those willing to pay in all cash for presales. Here's a hint - those units don't and likely will never exist.
4. No one really knows how much Evergrande truly owes but it is unfathomably large - hundreds of billions of USD. Its cost of debt was high before this crisis - short term USD bonds were issued at 8 - 11%. Its cost of debt now does not exist as it cannot borrow in size
5. Will spare the details because it should be clear based on price and quantum that Evergrande is caught in a debt spiral that has been playing out for years. Rather than dwell on this, lets take it as a given to analyze the current condition and why it matters NOW:
6. The writing has been on the wall for some time, but the situation is rapidly deteriorating. Equity has gone from ugly slide to desperate crash this week on huge volume. Desperate attempt to save the stock by rumoring a "special dividend" on Friday was last gasp. Down 30% since 
7. Simultaneously after surviving its USD bond selloff last Sept and April, its bonds selloff is rapidly accelerating. Its short term USD bonds dropped 17 POINTS on Monday.
8. This week two new damning reports: First, banks have begun freezing assets, and second, a local authorities banned pre-sales after showing that presale funds have indeed been improperly used (uh, ya think?)
9. Ok - so lets take for a given Evergrande is fucked. Does it matter? Yes. For several reasons. First - its direct debts outstanding are enormous - we've been desensitized to huge $ figures, but hundreds of billions of credit losses for single company would be unprecedented.
10. Beyond direct losses 1. China banks are stretched to the brink (see Huarong) - property sector is the biggest exposure 2. Property market IS the Chinese economy and holds vast majority of Chinese wealth 3. Prop market provides funding for local govts and SEOs via land sales
11. Evergrande is the largest, but it is merely the highest profile example of an industry on the brink. There are and will be many others, particularly as all lending to the sector dries up with contagion fears.
11. Broadly, the property bubble has been written off by western observers as un-poppable since it has gone for so long, but meanwhile this year the highest levels Beijing have been openly warning about the impending crash.
12. But this is China - can't Beijing just payoff everyone's debts or stop contagion? So much of the credit system is decentralized from Beijing, and the true health of the system of even state owned banks like Huarong are hidden internally from central regulators
13. So untangling this mess of bad credit cannot be done with a pen stroke no matter how much they want. Its also clear that Beijing wants to break its implicit guarantee and has turned on the new minted billionaires of its private sector.
14. The prospect of a full scale credit collapse will surely draw pragmatic solution from central planners, but niave to think that a catastrophe can definitely be avoided by central intervention.
15. Failure of property developers will destroy all of its surrounding ecosystem of smaller contractors and service providers, destroy savings and wealth of Chinese people, and could upend its entire financial system which would imperil all sectors
16. For a broader discussion of the importance of the property sector and sector see my previous thread on the topic
https://twitter.com/TheLastBearSta1/status/1399748954082971659?s=20
17. In short - China, the worlds second largest economy - may be on the brink of its Sept 2008 moment. Even if your base case is that the can will be able successfully be kicked down the road in the near term, the risk is rising everyday.
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