Evergrande of Red China – is predicted by us to formally default this month – in its interest repayments on its corporate bonds – that will evidence the driving force behind the companies collapse – the Chinese Communist Party.
A company that was founded in 1996 (entering the Hong Kong stock exchange in 2009) – and whose growth was based on massive expansion financed by Chinese banks and global bond market – (and who has presently $20 billion of dollar denominated bonds outstanding) supported by its political connections in Beijing.
In fact, according to the Xinhua News Agency – in 2018 it became the most valuable real estate company worldwide.
And yet – 3-years later – it is on the verge of complete collapse…why?
Has the Chinese property market shrunken? No
Has the economics behind the company’s business model failed? No
The reason we believe is the “changing” face of the Chinese Communist Party
This is a party dictatorship that seized power in 1949 with its sole central theme of “class struggle” on its road to socialism – and who has led its people through the following decades – with millions of its citizens dying of hunger due to the complete mismanagement of the economy as it followed Mao’s “(much better named) great leap backwards” and who entered the 1990’s as economically bankrupt.
At this point in 1991-2 the Reds had simply two choices – to allow political freedoms for its people – and sign its own death warrant (as had faced the Russian communists in Moscow) or to “show a humble face” to the world politically and allow new economic conditions to prevail that would encourage private ownership and entrepreneurship.
The Reds chose the latter – and with the aid of their constant bed-fellows – the Globalists (who saw both an “untapped” Chinese consumer market and new ways to increase their own profits by transferring work and employment opportunities from their own countries to Red China) we have witnessed millions of jobs move from the West to China, billions of dollars in trade deficits and priceless amounts of technology transfers – to our political enemies.
As Desmond Shum author of the book “Red Roulette” whose ex-wife was one of the local entrepreneurs with political connections whose businesses flourished – until she was arrested in 2017 and has since “disappeared” – “The party (Chinese Communist) had to let private ownership and entrepreneurship flourish in order to save the country. But by 2005 the party could afford to revert to [state dominance]. They never changed; it was expediency.”
And so, we return to the story of Evergrande – and our own hypothesis
As China grew economically – and with the replacement of the Red’s collective leadership by Xi Jinping – managed to create a personal dictatorship by removing the term limits that were put in place to stop exactly this eventuality.
With the political base safe – personal economic greed came to the forefront – and as in previous times – the Russian “playbook” was again borrowed.
Firstly, the political environment needed to be created – and the Red campaign “against corruption” …or what should be more accurately coined as a campaign against non-Communist corruption”
Within this pretext the Reds unveiled “3 red lines” to stop the “independent” growth of property developers namely, the ratio of liabilities to assets; net debt to equity; and cash to short-term borrowings. Based on data from Beike Research, part of Chinese property group KE Holdings, immediately 14 of the 30 largest property companies were put “under notice”
And from this point – the future of Evergrande as an independent company became impossible.
Because it is our belief – that what we are witnessing is not the free market collapse of a company – but a Red inspired “Yukos 2.0”
For those who remember, Yukos was the one of the largest oil companies in the world – until it was claimed by Russian tax authorities to owe $27 billion dollars in back taxes – a number far larger than even its multiple years turnover. Subsequently its assets were frozen – then taken by the state – and sold in a closed room auction for a fraction of its value to a “shell company” that had only just been created – whilst Yukos’s ownership was placed in jail for alleged corruption.
And as the higher echelons of the Russian political elite financially benefited from the “forced takeover” of Yuko in 2004-5 – we watch eagerly to see if our hypothesis is correct and will the positive assets of Evergrande itself – be taken over by “friends of the leader” Xi Jinping – solely to enrich themselves – whilst the billions of dollars of liabilities will be “pushed” onto a “failing” bank
As Desmond Shum wisely says ““The red aristocracy will always have privileges – they go to different schools starting at kindergarten, they live in different compounds. . . That’s the way the system has always worked, that’s the way the system is structured. If you’re not connected to political power in China, you will never do anything of significance.”