Evergrande’s potential debt crisis is ‘not a contagion’ to the stock market, says man who 10 years ago said company was insolvent
Citron Research founder Andrew Left felt somewhat justified on Monday, as China’s Evergrande appeared to be on the brink of collapse, sending shockwaves through financial markets.
“Yes, I feel justified,” he told MarketWatch in a telephone interview Monday.
In 2012, Left accused the prominent real estate developer of aggressive accounting practices and accused it of being de facto insolvent, based on his investigation.
Read: Evergrande isn’t the only reason the stock market is heading for its worst day in 2 months. Here are 5 more reasons
Left said the balance sheet of China’s second-largest property developer has not changed much since his original analysis of the problems, other than the magnitude of the problems.
“Nothing has changed in the 10 years since that investigation… I just identified when the problems started,” Left told MarketWatch.
has more than $300 billion in debt and holders of Evergrande’s approximately $19 billion dollar-denominated bonds wonder what will become of their investments as Wall Street tries to gauge the potential spillover effects a collapse could have on China’s real estate sector and global financial markets.
However, the left sees the problem as a likely one that will be mitigated by China’s nature to control its economy and its tendency to rescue troubled companies.
“So they’re going to do what they have to do” to limit damage to the broader economy and limit spillovers, Left explained. However, he said investors here are unlikely to see the wheels of China’s machinery move because of Beijing’s tendency to operate behind a veil when it comes to business matters.
as The Wall Street Journal described: In a Friday article, China’s Evergrande Group turned billions of dollars of borrowed money “into the dream of home ownership for millions of Chinese citizens.”
However, that dream was financed with outsized loans that are due soon.
Evergrande faces an $83.5 million interest payment on September 23 on its March 2022 bonds and a $42.5 million payment on September 29 on its March 2024 bonds, according to news reports. If these payments are not made within 30 days of the due date, Evergrande would be in default.
S&P Global Ratings said Monday that a default by Evergrande would cause more than just ripples in financial markets, but unlikely to trigger a tidal wave of defaults.
Left believes China’s likely intervention in Evergrande will limit any spillover and prevent potentially damaging ripples in global markets, he speculated. “They’re just going to get more control over it,” Left said of the Chinese government regarding Evergrande. “It’s not a contagion event,” he said.
Nearly a decade ago, the founder of Citron Research was banned from trading in Hong Kong’s markets after losing a civil suit against regulators over his allegations about Evergrande. The legal dispute lasted more than half a decade and cost him millions.
Left said his ban on the Hong Kong market will be lifted next month, but it’s not clear if he will at least invest much there.
“I got a complete black mark on me for saying everything that turned out to be true,” he was quoted as saying in Institutional investor last month. “It’s Hong Kong’s attempt to stifle the truth. They knew it was going to happen, but they didn’t need a shortseller to say anything about it.”
Left told MarketWatch that part of the reason he believes Evergrande has achieved such a high position is because of the fame of its Chief Executive, Hui Ka Yan, who founded the company in 1996 in Guangzhou as Hengda Group.
“Clearly China is overbuilt,” Left said of the Chinese real estate market. “But I think it’s a problem that they let this man run wild,” he said of Evergrande’s CEO.
Hui has a personal fortune of about $10.7 billion, according to Forbes. Hui floated Evergrande on the stock market in 2009, and according to reports, he owns most of the company.
The South China Morning Post last month reported that Hui stepped down as chairman of the close-knit Hengda Real Estate Group, in a reshuffle that “expressed concern over his hold on his flagship China Evergrande Group.”
Concerns about Evergrande have been blamed on a broad market sell-off, leaving the Dow Jones Industrial Average on track for its worst daily decline since Oct. 28, 2020, according to data compiled by Dow Jones Market Data. The S&P 500 index SPX,
and the Nasdaq Composite Index COMP,
were also unraveling, down 2.7% and 3.2% respectively on Monday.