💫 Evergrande - Deep Dive into the Details 💫

Wanted to do a little deeper dive into this Evergrande situation that's going on in China, making a lot of headlines, but the details are kind of murky so I wanted to kind of, you know, examine that a little bit closer. So what's going on? Evergrande is the second biggest property developer in all of China. So that's a huge scale, huge magnitude, huge company here, huge organization. Now they have accumulated $305 billion worth of debt and they have announced this week, or actually the end of last week, that they can no longer make their debt payments. So that's all coming to the forefront now. And keep in mind that 305 billion dol a B that they owe out to 291 different banks and creditors across the world. Many are Chinese, but there's also about half of them are offshores to China. So this isn't just a China problem, this is a world economy problem, potentially they could be brewing. So something I definitely wanted to touch on because it's super important whether it's mortgage related, which I do every day, or just in general. If you have a retirement account, this is important to you. So my first question was how the heck did they get in this situation? How does someone get 300 or how does a company get 305 billion DOL in debt? So two factors there, one creative accounting and the other is Covid. So you've got each year a publicly traded company like Evergrande, they do a profit and loss, they do their balance sheet and they have it audited and they have accountants involved. Well, the auditors and accountants last year in 2020, they didn't really raise the red flags where they should have been raised because they were having issues then that if we, if everyone would have known, maybe wouldn't would have prevented such a big issue from happening. But they kind of just, you know, signed off on everything, didn't alert the authorities that should have been alerted. This opened up Evergrande to be able to qualify for more debt. You know, Covid happened and many credit lines were open for a lot of, you know, in the US we had the PPP loans for example, for businesses. Similar idea, a lot bigger scale of course for a huge corporation. So they were grabbing debt left and right because they could qualify for it because it looked like they were profitable on paper when they really weren't as profitable. So that's where a big part of it started. They were able, able to get a lot of debt they shouldn't have gotten. Then Covid happened and as we all know that impacted, you know, economies across the world, especially housing developers. You know, they were halted a little bit. So if you're a massive housing developer and people aren't building and everyone's kind of shut down and people aren't out of their houses for a while, you know, when Covid was at its worst, you know, the only way they could think to stay in business was we got to cut deals to make it super affordable. So people continue to buy and build houses, we'll make it through Covid, and then, you know, figure it out from there. So they were cutting their profits just to simply be able to continue, continue working. So they're not making the money that they typically would and they're accumulating debt faster than ever. So eventually when that all came crashing together, you know, the profit loss, they were losing a lot and they weren't profiting. And that's where we end up with the headlines we have today. So again, this is an impact because these creditors that have loaned out in total between all of them, $305 billion worth of debt to Evergrande, they now were respecting their payments, they now are not receiving their pay. And the Chinese government doesn't appear to be jumping in and helping. So, you know, oftentimes if this were to happen in the U.S. you know, like when the auto industry was having issues, the US government came in, had a bailout to prevent a massive landslide collapse in the U.S. economy. Well, not quite the case right now, at least what it's what the info we have right up to this moment is. China's not really jumping in to help out Evergrande. So they've just told their local authorities in China to, hey, prepare for a possible landslide event happening here in the next month or so, because they guess they're giving Evergrande a 30 day grace period to try to come up with the money. I mean, again, I don't, I don't have 3 to 5 billion. I don't know where you find that in a month if you don't have it today. My thought is you probably won't have it in a month, but they're at least giving them a grace period. But while that's happening, it's definitely worth being alerted. So to dive into those numbers even a little bit more, make a little bit more sense of all this. We can compare a lot of things. We could at least make a reference to the 2008 financial crisis in America, where, you know, obviously the housing market was a huge, huge impact there. But the Housing market only makes, makes up 13% of the GDP in America. The housing market in China, which is where the issues are at right now, makes up 29%. So substantially, substantially bigger deal there. And we all, we all know how big of a deal it was already when it made up 13% of the US economy. So the magnitude is, you know, kind of unfathomable here then for more of like a house by house or a household of a level of people's, you know, household retirement. Every, every equity that somebody has in China of on average, 40% of that is tied into their household equity. So like 60% might be retirement funds and the other 40% is tied up at the equity of their houses. But if you have a huge housing developer that now is having major issues, they're not going to be able to continue to build houses that could certainly collapse house prices and that house, so the house values plummet. And that 40% of people's, you know, entire life savings that's tied up in their house could certainly be squashed. So it actually could be, it's not even just, you know, affecting the big banks, you know, the big companies. This could be a thing that affects like actual families as well. If their house values plummet, then for the global economy, you know, if people that invested, for example, in Evergrande or Evergrande, sorry, it looks like Evergrande on paper. People that invested in Evergrande, you know, across the world, their investments have plummeted. I looked at it earlier. Evergrande's Stock is down 80% on the year. So, you know, it's almost, you know, it's almost diminished. And that's probably unrecoverable. So huge issues there. But that also doesn't stop because these, these other creditors that have loaned money, well, their stock is now the next thing that probably will be hit because if they, they have payments and bills as well, if they don't have their income coming from Evergreen's payments, it trickles down where they probably can't make their payments as easily. And their stock variable could plummet. So people invested in those companies now could have issues. So this could be like waves and waves of things that it hits and people that impacts. So that's why it's so important. Not even. This isn't even just a mortgage update. It is, but it's also way bigger than that. It's just kind of a person to person across the world update. Everyone should at least kind of be notified of, I feel like. So that's what's going on and at least at this moment, you know, Chinese government's not jumping in to help to help cushion that blow which really leaves the door open for some nasty things to possibly happen. So I'll keep you updated. The big thing there in the mortgage impact on all of this is that's a huge scare to any market, any global market out there. Every country in the world, you know, kind of has their antennas up right now and you know, many investors will probably recommend shifting out of shifting out of the riskier stock investments jumping into a safer bond investment when bonds get stronger. That helps mortgage rates. So this actually could come full circle and the one benefit possibly is mortgage rates could, you know, have a little cushion because as of you know, the latest update from the Fed, rates are going to go up. This could kind of cushion that blow and keep them, you know, still at relatively low levels.