This is the vacancy level of Grade A office buildings in different cities. The top two cities are Taipei and Hong Kong, which have a lower than 10% vacancy rate. All the rest of the cities in China’s rates are over 10%, and 19 cities’ rates are over 30%! The bottom three cities are Changchun, Wuxi and Nanchang. Their vacancy rates are over 40%.
For the residential market, the situation is also very bad. Evergrande has been trying to sell its properties at deep discounted prices, but didn’t sell out much. Prices of new houses are dropping. Trade volume of existing houses has been dropping too.
[5] Some Unofficial Accounts
There is also information that local governments are required to take over Evergrande’s projects, or help Evergrande sell their properties.
This is a chat record from Jinan City Construction Group. This kind of group often belongs to the local government. So the chat record says our group is ready to take over Evergrande’s branch in Jinan City. The central government is giving tasks to each province. Each province should take care of the Evergrande branch in their province, and the province is giving tasks to the cities.
So this post is also circulating on Chinese social media platforms. It says that it is Xu Jiayin who asked to go bankrupt, as in all these years, through years of high dividend distributions, he had already grabbed all he could grab from Evergrande, and transferred those dividends to safe places. So now the authorities are in a very difficult situation, not knowing what to do.
The post also says, the key issue is, the five major Chinese state-owned banks are the guarantors of Evergrande’s overseas debts, which must be paid by the banks. Therefore, the CCP cannot let the banks go bankrupt. That is the major problem and headache.
Let me show you a report: So this report says that Xu Jiayin holds 70% of Evergrande’s shares, in the ten years from 2011 to 2020, he cashed out 50 billion yuan, or $7.74 billion via dividend distributions.
This post says that Evergrande has over $100 billion overseas debt and that amount is about 30% of China’s total foreign reserve. As 60% of China’s foreign reserve cannot be used, then if the CCP wants to save Evergrande, that means almost all the usable foreign reserve will be used up by Evergrande. That’s the hardest part of the problem.
[6] Controlled Demolition?
So, will the CCP save Evergrande or not? Some people say it will, some people say it won’t.
It was reported that the CCP regime has injected 120 billion yuan into the banking system, so that could be a sign that the CCP may want to save Evergrande.
Asian Markets reported yesterday that, “Sources close to the Chinese Government have told Asia Markets a deal that will see China Evergrande restructured into three separate entities is currently being finalized by the Chinese Communist Party and could be announced within days.
“State-owned enterprises will underpin the restructure, effectively transforming the property developer into a state-owned enterprise. ”
Why did the share price of Evergrande open very high today? I think it must be that some people believed that the CCP would save Evergrande, and Evergrande’s crises would be smoothed out.
However, the Wall Street Journal reported today that “China Makes Preparations for Evergrande’s Demise”, “Beijing, reluctant to bail out the country’s most heavily indebted property developer, is asking local officials across the country to prepare for a ‘possible storm’.”
I will leave it to you guys to choose which of these two contradicting reports you want to believe. However, it seems to me both of them go well with a theory that what the CCP actually wants is a controlled, and targeted demolition, or explosion of Evergrande’s bubbles.
So the main arguments of this controlled demolition theory are:
No. 1. The CCP came to know about Evergrande’s problems a long time ago, at least one year ago when Evergrande blackmailed the local government to bail it out. If the CCP wanted to save Evergrande, it should have done so long ago. But it didn’t. It only looked at how Evergrande was doing. But the CCP did try to help in terms of suppressing bad news about Evergrande.
No. 2. The first Evergrande bubble that was allowed to burst was its wealth management products. In our last show about Evergrande, we played many videos of victims protesting inside and outside of Evergrande office buildings in different cities. During that week, it seems that the CCP didn’t suppress those videos, or bad news about Evergrande from being spread.
You know, in CCP’s China, if the CCP really wants to suppress something, there is no chance that those kinds of videos can survive or be spread. So, it is possible that the CCP actually purposely allowed to have that bubble burst first, as many of the victims are Evergrande’s employees, and the products are wealth management products, which means, those people had extra money to invest in some high return products. So they can afford the losses. So that’s why the CCP allowed that bubble to burst.
No. 3. The business model of Evergrande has been a high level of leverage, a high level of investment, and a quick turnaround. So this means it borrowed a lot, invested a lot, and must be able to build and sell its properties quickly enough. This is a very risky model, and can only work when the market is going up, and when there is enough money to be borrowed. If any problems occur in the entire process, its capital chain will break, and situations like we are seeing today will occur.
As a matter of fact, the CCP has been trying to get away with this kind of business model in recent years. That was why it drew 3 red lines for real estate developers last year so that it became much more difficult for the developers who already had high debt levels to borrow more from the banks.
So, the CCP wants to have the bubbles burst, but under a controlled fashion, to reduce the shock waves to the real estate market and the entire economy.
The CCP could also adopt a method that it had used before to deal with the bad loans of the state owned banks. And the method is, to have state-owned asset management companies acquire those bad loans, so that the banks’ financial status can continue to look good, or OK.
Then the CCP government can use its tax money to slowly absorb those bad loans. As the CCP’s tax money all comes from the people, so, in the end, it will still be the Chinese people who pay the bills.
So, this probably is the CCP’s plan for Evergrande.
In the meantime, I think the CCP will also observe market reactions and reactions from other aspects to adjust its tactics. But one thing is for sure, the time when everybody thought that the real estate market would always go up is over. What awaits us are more and more uncertainties and risks.
[7] Successful Escapes
It was said that recently Hong Kong property tycoon Li Ka-shing had just sold a Shanghai property and cashed out 2.1 billion yuan. Actually, up to 2019, he had already cashed out more than 170 billion yuan from China.
On Sep. 10, America’s leading investment company Blackstone’s acquisition of SOHO China, another Chinese developer collapsed, and on the following day, Pan Shiyi, the founder of SOHO China, and his wife Zhang Xin appeared in New York to watch the tennis open. Their appearance was spotlighted by CCTV and attracted a lot of attention at such a sensitive time. You can see Pan Shiyi and his wife Zhang Xin at the left bottom of this screenshot for CCTV video.
To Save or Not To Save Evergrande: Is It Still A Question? Too Big to Fail, or Too Big to Save?
Hello, everyone! Welcome to “Inconvenient Truths by Jennifer Zeng”.
“To be, or not to be, that is the question” for Prince Hamlet. “To save or not to save Evergrande”, that is the question for the Chinese government, or, rather, the Chinese Communist Party, the CCP.
Well, that was the opening of my program about China’s largest real estate developer Evergrande last September. One year later, I can still use it as the opening for my program today. I will discuss whether the CCP will save Evergrande or not, and what is the most likely scenarios and ending for Evergrande. And I promise, I always have unique content that you cannot get from the so-called mainstream media.
[1] Update of Assassination of Xi Jinping: Former Police Chief of Jiangsu Province Removed
Before I talk about Evergrande, let me give you a quick update of the plot to assassinate Xi Jinping that I talked about last time.
If you haven’t watched it, please go check it out.
Now, let me show you a piece of news: This official CCP report says that on Sep 22, that is yesterday, Wang Like, you can see his photo here, who is a member of the Standing Party Committee and the Party Secretary of Political and Legal Affairs Committee of Jiangsu Province was expelled from the party and removed from his post.
The report also says that he “voluntarily surrendered” himself on October 24 last year.
Why was he punished? The report says he has never been loyal and honest to the party, he involved the creation of a gang inside the party, he didn’t cooperate, and even confronted the party’s investigation, he sabotaged the political ecology of the CCP’s political and legal system, especially the public security system, in the area where he served.
So what was the “area where he had served”? He had been the head of the Political and Legal Affairs Committee of Jiangsu Province since September 2017, and before that, he was the director of the Public Security Department and Party Secretary of Jiangsu Province, where the attempted assassination of Xi Jinping happened in December 2017.
Remember we talked about the one who was expelled from the party for planning some “misconduct” against the nation’s main leader? His name is Luo Wenjin, who was the former police chief of the Criminal Investigation Department of Jiangsu Province.
So, this guy, Wang Like, who was just removed yesterday, was Luo Wenjin’s direct supervisor when the assassination attempt happened. And Wang’s main crime is “never being loyal and honest to the party”, creation of a gang within the political and legal system, etc.
The other day when I replied to a comment on my last video, I said that when you read anything from CCP China, you always need to read between the lines, and only fools believe in what is said on the surface.
So, this latest development of this matter confirms our conclusion last time: There was a very real assassination attempt to kill Xi Jinping back in 2017, and more people who were involved in that attempt are being purged now. Wang Like is the latest one.
Now, let’s move to our next, and main topic today: Evergrande.
[2] Ripple Effects of Evergrande’s Collapsing
First of all, Evergrande’s bad news has been causing ripple effects not only in China’s real estate market, but also in Hong Kong and the world.
There was a panic selling off of Evergrande and other developers on Monday.
These are the Evergrande’s share price charts at Hong Kong Stock Exchange. The top left one is for the past three month, the top right one is the past year, the bottom left is for three years, and the bottom right is the price for the past 10 years.
So I don’t think we need any explanation to see how bad the situation has been.
Now, let’s see today’s situation.
So you can see that today it opened at a much higher level than the previous trading day, and had a sharp rise at the early stage, but couldn’t stay at this high of a level and experienced a deep dive, and maintained a lower than opening level the entire afternoon.
Now, let’s see another chart with the trading volume included.
You can see that today’s trading volume is significantly greater than the previous days, but such a great trading volume didn’t push the price up much. This shows that a lot of people have been selling off when the price jumped up.
Why was the situation like this? I will explain later.
Now, let’s see the index of Shanghai market:
You can see that on Sep 14 and Sep 16, the index suffered deep drops, it jumped back up yesterday, but wasn’t able to stay at that level today. The green color means it closed lower than the opening.
Now, let’s see the Hang Sheng index of Hong Kong Stock Exchange:
Let’s go to the one month range. Can you see the deep dive this Monday, Sep 20?
Now let’s see Dow Jones Index .
If we check the one week range, we can also see the sharp drop from Sep 17-Sep 20. Of course there are other factors in this drop, but Evergrande’s crisis certainly played a big role too.
Even cryptocurrencies such as Bitcion were affected.
If we choose a 7 day range, we can also see the deep dive on Sep 20 and 21.
So, as a result, many wealthy people were affected too. On Sep 20, the world’s 500 richest people lost $135 billion because of the drop of share prices.
The world’s top 10 richest people lost over $26 billion.
Tesla’s Elon Musk, the world’s richest man, is the one who suffered the most loss, with his net worth dropping by $7.2 billion, while Jeff Bezos, the founder of Amazon and the second richest man, saw his net worth plummet by $5.6 billion.
[3] Latest from Evergrande
On the Evergrande side, it announced on Sep 22 that it would pay the interest of its Shenzhen-traded bond of 4 billion yuan that was issued last year, with an interest level at 5.8%. The method of payment has been resolved through over-the-counter negotiations. So the interest payment will be $35.8 million.
Today is the deadline for an $83.5 million interest payment on a 5-year, USD denominated Evergrande bond. The bond’s initial issue size was around $2 billion. Up to now, I haven’t see any official news about how this payment is going. But rumors on Chinese social media say that Evergrande’s bondholders didn’t receive any information about the interest payments due today, and that Evergrande has stopped paying its suppliers and employees.
Another multi-million dollar interest payment on a 7-year USD bond is due the following week.
Now, let me show you a report.
So it was reported that Xu Jiayin, the chairman of Evergrande, flew to Beijing on his private plane on Sep 15. If this is true, he might be seeking help there.
Then, it was also reported, on the traditional Chinese festival, Mid-Autumn Festival, or the Moon Festival, that was Sep 21, Xu Jiayin wrote a “family letter” to all employees.
He admitted in this letter that Evergrande had encountered “unprecedented great difficulties” and claimed that Evergrande would definitely walk out of the darkest moment, and resume its construction work to complete the task of “ensuring the delivery of our buildings”.
So, does this mean that he has gained promises from Beijing? We have no idea so far.
Then yesterday, Evergrande gathered all its 4000 management members to hold a meeting overnight, and required them to resume the construction work as soon as possible to make sure that the properties can be delivered on time.
However, let’s watch this video, which shows one of its projects that has been abandoned for a long time.
Another piece of bad news is Anqing City in Anhui Province has announced yesterday that it would take back the land use right that it gave Evergrande before, because Evergrande failed to pay for the right.
By the way, in China, in theory, all the land belongs to the government. You can only buy the right to use it, not to buy the ownership of it. So if you buy a house, you have 70 years’ right to use that piece of land, but you don’t own that land.
If you say, what will happen after 70 years? Who knows? Maybe the CCP didn’t plan to exist longer than 70 years when they made up that policy.
[4] Too Big to Fail, or Too Big to Save?
Now, the next question is, is Evergrande too big to fail, or too big to save?
We’ve reported last time that Evergrande’s total debt is about 2 trillion yuan, or about $310 billion.
Out of the 2 trillion yuan, 500 billion yuan is owed to its suppliers, and this is almost the sum of all other Chinese real estate developers.
Also, right now, Evergrande has borrowed more money from other companies than from the banks, as banks have stopped lending money to it long ago. This is a very unusual situation and also very risky.
Chinese language website Caixin published an article questioning how Evergrande could borrow 2 trillion yuan when its total annual sales was only 700 billion yuan, but that article was deleted shortly after being published.
And other developers have the same problem. For example, Ludi has a 1 trillion yuan debt, Fuli needs 500-800 billion yuan to be saved, Rongchuang needs 500 billion to 1 trillion yuan, Baolide needs 200 billion yuan, etc.
So altogether, that is already about 5 trillion yuan. And these developers still owe 5 trillion yuan in debt borrowed from other companies and their employees.
So the total amount is about 10 trillion, or $1.55 trillion.
But there is another bigger bubble than Evergrande, and that bubble is the local governments’ debts. In 2020, the total local government debt is 25.66 trillion yuan, or nearly $4 trillion. If we add the debt of the central government, that is 46.55 trillion yuan, or $7.2 trillion.
We’ve already said before that 70% of Chinese people’s wealth is locked in the real estate market. In the meantime, 28% of China’s GDP comes from the real estate market, and 40% of the local governments’ revenue comes from land sale, or the real estate market.
So in this sense, we can say that Evergrande, or the entire real estate market is both too big to fail and too big to save.
And how bad is the market already?
Let me show you a chart.
This is the vacancy level of Grade A office buildings in different cities. The top two cities are Taipei and Hong Kong, which have a lower than 10% vacancy rate. All the rest of the cities in China’s rates are over 10%, and 19 cities’ rates are over 30%! The bottom three cities are Changchun, Wuxi and Nanchang. Their vacancy rates are over 40%.
For the residential market, the situation is also very bad. Evergrande has been trying to sell its properties at deep discounted prices, but didn’t sell out much. Prices of new houses are dropping. Trade volume of existing houses has been dropping too.
[5] Some Unofficial Accounts
There is also information that local governments are required to take over Evergrande’s projects, or help Evergrande sell their properties.
This is a chat record from Jinan City Construction Group. This kind of group often belongs to the local government. So the chat record says our group is ready to take over Evergrande’s branch in Jinan City. The central government is giving tasks to each province. Each province should take care of the Evergrande branch in their province, and the province is giving tasks to the cities.
So this post is also circulating on Chinese social media platforms. It says that it is Xu Jiayin who asked to go bankrupt, as in all these years, through years of high dividend distributions, he had already grabbed all he could grab from Evergrande, and transferred those dividends to safe places. So now the authorities are in a very difficult situation, not knowing what to do.
The post also says, the key issue is, the five major Chinese state-owned banks are the guarantors of Evergrande’s overseas debts, which must be paid by the banks. Therefore, the CCP cannot let the banks go bankrupt. That is the major problem and headache.
Let me show you a report: So this report says that Xu Jiayin holds 70% of Evergrande’s shares, in the ten years from 2011 to 2020, he cashed out 50 billion yuan, or $7.74 billion via dividend distributions.
This post says that Evergrande has over $100 billion overseas debt and that amount is about 30% of China’s total foreign reserve. As 60% of China’s foreign reserve cannot be used, then if the CCP wants to save Evergrande, that means almost all the usable foreign reserve will be used up by Evergrande. That’s the hardest part of the problem.
[6] Controlled Demolition?
So, will the CCP save Evergrande or not? Some people say it will, some people say it won’t.
It was reported that the CCP regime has injected 120 billion yuan into the banking system, so that could be a sign that the CCP may want to save Evergrande.
Asian Markets reported yesterday that, “Sources close to the Chinese Government have told Asia Markets a deal that will see China Evergrande restructured into three separate entities is currently being finalized by the Chinese Communist Party and could be announced within days.
“State-owned enterprises will underpin the restructure, effectively transforming the property developer into a state-owned enterprise. ”
Why did the share price of Evergrande open very high today? I think it must be that some people believed that the CCP would save Evergrande, and Evergrande’s crises would be smoothed out.
However, the Wall Street Journal reported today that “China Makes Preparations for Evergrande’s Demise”, “Beijing, reluctant to bail out the country’s most heavily indebted property developer, is asking local officials across the country to prepare for a ‘possible storm’.”
I will leave it to you guys to choose which of these two contradicting reports you want to believe. However, it seems to me both of them go well with a theory that what the CCP actually wants is a controlled, and targeted demolition, or explosion of Evergrande’s bubbles.
So the main arguments of this controlled demolition theory are:
No. 1. The CCP came to know about Evergrande’s problems a long time ago, at least one year ago when Evergrande blackmailed the local government to bail it out. If the CCP wanted to save Evergrande, it should have done so long ago. But it didn’t. It only looked at how Evergrande was doing. But the CCP did try to help in terms of suppressing bad news about Evergrande.
No. 2. The first Evergrande bubble that was allowed to burst was its wealth management products. In our last show about Evergrande, we played many videos of victims protesting inside and outside of Evergrande office buildings in different cities. During that week, it seems that the CCP didn’t suppress those videos, or bad news about Evergrande from being spread.
You know, in CCP’s China, if the CCP really wants to suppress something, there is no chance that those kinds of videos can survive or be spread. So, it is possible that the CCP actually purposely allowed to have that bubble burst first, as many of the victims are Evergrande’s employees, and the products are wealth management products, which means, those people had extra money to invest in some high return products. So they can afford the losses. So that’s why the CCP allowed that bubble to burst.
No. 3. The business model of Evergrande has been a high level of leverage, a high level of investment, and a quick turnaround. So this means it borrowed a lot, invested a lot, and must be able to build and sell its properties quickly enough. This is a very risky model, and can only work when the market is going up, and when there is enough money to be borrowed. If any problems occur in the entire process, its capital chain will break, and situations like we are seeing today will occur.
As a matter of fact, the CCP has been trying to get away with this kind of business model in recent years. That was why it drew 3 red lines for real estate developers last year so that it became much more difficult for the developers who already had high debt levels to borrow more from the banks.
So, the CCP wants to have the bubbles burst, but under a controlled fashion, to reduce the shock waves to the real estate market and the entire economy.
The CCP could also adopt a method that it had used before to deal with the bad loans of the state owned banks. And the method is, to have state-owned asset management companies acquire those bad loans, so that the banks’ financial status can continue to look good, or OK.
Then the CCP government can use its tax money to slowly absorb those bad loans. As the CCP’s tax money all comes from the people, so, in the end, it will still be the Chinese people who pay the bills.
So, this probably is the CCP’s plan for Evergrande.
In the meantime, I think the CCP will also observe market reactions and reactions from other aspects to adjust its tactics. But one thing is for sure, the time when everybody thought that the real estate market would always go up is over. What awaits us are more and more uncertainties and risks.
[7] Successful Escapes
It was said that recently Hong Kong property tycoon Li Ka-shing had just sold a Shanghai property and cashed out 2.1 billion yuan. Actually, up to 2019, he had already cashed out more than 170 billion yuan from China.
On Sep. 10, America’s leading investment company Blackstone’s acquisition of SOHO China, another Chinese developer collapsed, and on the following day, Pan Shiyi, the founder of SOHO China, and his wife Zhang Xin appeared in New York to watch the tennis open. Their appearance was spotlighted by CCTV and attracted a lot of attention at such a sensitive time. You can see Pan Shiyi and his wife Zhang Xin at the left bottom of this screenshot for CCTV video.
Then people dug out Pan Shiyi’s travel history and found that he arrived in the US on Jan 9 last year, departed on July 29 this year, and then, after only less than 10 day’s stay in China, he returned to the US on August 7, and has not left since then.
So this shows that he had arrived in the US before the deal with Blackstone collapsed. Some say that the collapsed deal with Blackstone was a failure for Pan Shiyi, but some say no, he has already sold his properties in Shanghai and cashed out more than 20 billion yuan. So he is definitely not a loser.
You know, Chinese people call the action of bypassing the CCP’s Great Fire Wall on the internet “jumping over the wall”. So people say that Pan Shiyi and his wife have physically jumped over the wall, and congratulate them for being wise enough to do this.
So can we call that a great, successful escape?
OK, that’s the story I prepared for you today. I hope you’ve enjoyed watching it and learned something new. If you like my programs, please do help me spread them.
Thank you very much. See you next time!
9/23/2021*
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