2015-03-18

Chinese Banks Bailout Evergrande

Update: It was a Potemkin bailout.

Chinese Developer Evergrande Gets $16 Billion Lifeline Amid Slump
Evergrande said on Tuesday that since February, it had secured new credit lines totaling 100 billion renminbi, or $16.2 billion. Those included a new, 30 billion renminbi commitment on Monday from the Bank of China, which regards the developer as “its most important bank-wide long-term partner,” Evergrande said in a news release.

...Analysts said the support from the banks — which also include the Agricultural Bank of China, Postal Savings Bank of China and the privately controlled China Minsheng Bank — would provide temporary relief but would fall short of addressing the company’s deeper problems.

Mounting debts and slumping sales “are fundamental challenges that can’t be resolved short-term by government’s bailing them out on ‘too big to fail’ pretense,” said Junheng Li, the head of research at JL Warren Capital in New York.

“The company has been under financial distress for a long time,” she added.

From 2012: Citron says Evergrande is insolvent

Citron may be ultimately proved correct. In that post I highlighted one of the warnings signs on Evergrande: the founder was spending a lot of money trying to buy a championship for his Guangzhou soccer club. Vanity projects (along with mega projects, world's tallest skyscrapers, etc.) can be signs of a looming top for an individual, company or nation. He wasn't worried about blowing money on soccer in 2012, but today the firm is fighting for survival.

While Evergrande has received a lifeline, it's worth noting that Kaisa's debt levels exploded about 6 months before the firm defaulted.

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