Op-Ed: Evergrande, $300 billion debt, and chronic global systemic risk

A Hong Kong court has issued a winding-up order for Chinese real estate giant Evergrande – Copyright AFP STRINGER

Evergrande, the flagship of China’s image as a growth machine, is to be wound up by court order owing $300 billion. This is a classic moment in the global property sector, and a hideous example of the risks in the growth-at-all-costs mythos.

There are a few things that make it easy to be wise after the event regarding Evergrande.

The debt and expenditure got way out of control. Whatever was done didn’t work.

Constant reports of dodgy business in the sector as a whole got little action.

These vast amounts of money when in play couldn’t be stabilized. This is simply due to scale. How do you “balance” $300 billion sloshing about like that?

Obvious as all this should have been for some years, not much was actually done about it.

The “too big to fail” theory didn’t work either. Not with this amount of debt involved. It couldn’t work. This twelve-digit debacle is no minor writeoff.

There’s way too much more to say about this, and “Evergrande Syndrome” is likely to be an analytical tool for decades to come.

Evergrande started in 1996. It grew, it diversified, and it destroyed itself. A strange history of diversification, digression and no steering seems to be the mechanical side of this mess. This history alone, however simplified, makes you wonder who was making the decisions to achieve such a colossal disaster.

Of course, big corporate finance isn’t (and can’t be) as simple as that. A lot of deals, transactions, contracts, and similar hobbies have to happen. The overall impression was that Evergrande became a license to print money for insiders.

This is a very easy and superficial viewpoint if a bit unavoidable. There were signs that Evergrande was hitting the rinse cycle years earlier. In 2020, loud official public statement noises were heard regarding liquidity. Evergrande was soaking up liquidity, and therefore threatening debt repayments and basic business.  When this was made public, the whole Chinese property boom, poster sector of the New China, had an image problem.

The new tarnished image was better than the fact, as the figures now available show. Not helping at the time or now is the fact that this financial black hole also negatively affected foreign lenders and businesses in the gravity well.

This is an extremely complex tale of How Not To Survive In Business. It doesn’t need regurgitation. What’s needed is a perspective to cover the encyclopaedia of management issues.

Instead of “too big to fail” there’s a better term; “too big to manage itself”. Unless you’re a subscriber to what must eventually be a streaming series called Heartwarming Massive Corporate Collapses, that’s the management issue.

From the look of the strange and convoluted range of corporate operations this company simply wasn’t under rigorous management. The original company became an empire and then became a moneymaking factory for the operators.

The massive escalation of company debt is excruciatingly obvious. Who was making money out of this debt? Not Evergrande. Not China. Certainly not the shareholders. This is a classic symptom of a corporate meltdown. If debt isn’t under control, only one thing can happen.

Now extrapolate that to so many other debt-addicted companies worldwide. Evergrande is hardly the only company in history to hit the bottom line and melt itself down.

This is the same issue as applied to anyone or anything else involved in finance. Where’s the management? It’s probably funding a political campaign or a faction.  What it’s not doing is managing.

There is a mysterious phenomenon in business called “milking the business”. A lot of people do very nicely out of it. This process simply involves grafting one’s adorable self onto deals, commissions, transactions, and contracts, making kickbacks, and then paying yourself for doing it.

If you happen to have $3 billion rattling around looking for a home in someone’s pocket, do you think someone would be interested? How about $300 billion?

The gigantic amounts of capital and debt got totally out of control despite the fact that the most basic accounting would have shown the issues years before they got that bad. There would be millions of transactions, and the balance sheets should have spotted the sheer size of the debts.

The bottom line, and it IS the bottom, is that Evergrande could be any big company on Earth. Management worldwide has been crashing companies on much the same basis for decades.

This isn’t just corruption of management. Big institutional shareholders don’t seem to be interested, either. Who protects the public, associated businesses, etc. from these self-help exercises?

Governments sure don’t. they’ve been pushing deregulation for so long nothing much can happen to mis-managers. Add cronyism, and they just move on to destroy other companies and investments.

Corporate collapses are cases of systemic failure of capitalism and The fallout from big corporate collapses is the proof. Nobody’s guessing what happened after the sub-primes meltdown. Evergrande will leave a gaping hole in the credit market which probably can’t be plugged with more credit.

What are you going to do, kiss it better with press releases?  

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Disclaimer
The opinions expressed in this Op-Ed are those of the author. They do not purport to reflect the opinions or views of the Digital Journal or its members.