Well, a good thing can’t last forever…
That’s what some Wall Street investors are saying as markets react to the turbulent news coming out of the Chinese markets as this week wraps up.
You’ve more than likely heard talks of these struggles and perhaps even heard mention of the company Evergrande, but you may not know exactly what’s happening in the East to cause such alarm on Wall Street…
Join us today as we dive into this latest crisis and uncover the details including why some traders are worried this could be Lehman Brothers all over again!
What is Evergrande?
The Evergrande Group is the second largest property developer in China by sales. Incorporated in the Cayman Islands and headquartered in the Houhai Financial Center in Nanshan District, Shenzhen, Guangdong Province of China.
It’s ranked 122nd on the Fortune Global 500 and, as of 2018, is the most valuable real estate company in the world with a focus on selling upper and middle class apartments! Needless-to-say, it’s a massive money maker and player in the Chinese markets.
The Crisis
With a recent eye on massive expansion, Evergrande borrowed significant amounts of capital and took steps during the recent pandemic to keep cash flow coming in, offering significant discounts to its customers, allowing their sales charts to continue to grow despite falling markets.
Well, today, it appears these cost cutting decisions are working against Evergrande officials as today the company is suffering from a massive debt crisis and on the brink of total collapse!
Reports state the company currently has a debt burden of over $88 billion and total liabilities in excess of $300 billion and has failed to meet “three red lines” laid down by Chinese authorities to limit the indebtedness of real estate developers.
The company has taken steps to tackle this problem by hiring financial advisors and even opening up talks with the Chinese government for potential bail out assistance, though Chinese officials have stated they aren’t interested in bailing the company out anytime soon.
Many wonder how Evergrande officials were able to get so deep in the hole without anyone noticing until it was too late…
Just this past Spring, auditors reviewed the company’s books and gave the company a clean bill of health for the 2020 year. Now, investors are finding out that the company – and their investments – could go belly up in just a matter of months!
Today, following this latest update, this giant real estate developer’s stock sits at a mere $0.32 a share after prices fell over 80% in the last year alone.
Is This Lehman All Over Again?
History has a way of repeating itself, even the parts we’d rather forget.
… And watching Chinese behemoth try to hang on is all to familiar a story for those of us who were around in 2008 and saw our very own version of this story play out on U.S. soil.
A short history for those readers who may not know, Lehman Brothers was a Wall Street firm that had moved into mortgage lending by 2008. At that point in time, however, Lehman had assets of over $680 billion, but only $22.5 billion of this was firm capital.
As the 2007 mortgage crisis led to a wiping out of 73% of Lehman’s stock value by mid-2008, one of the world’s largest companies found itself on the brink of bankruptcy and looking to the U.S. government for bailout assistance before their eventual closure.
If Evergrande is heading down the same path Lehman did back in 2008, then there will ultimately be a significant reflection of this in the Chinese markets and more than likely be felt even in the U.S.
It may not even take that long as U.S. markets are already showing signs of being impacted even at the mention of Evergrande’s collapse.
Reflecting this news, the S&P was off as much as 2.9% at one point and the DOW lost more than 600 points by Monday’s closing bell showing that just the mention of such a collapse is enough to scare investors. Just imagine what could be in our future should it actually happen!
Learn More Here…
If you’re interested in getting further perspective on this latest market news to help you prepare for the future, we encourage you to join the latest broadcast of Ask the Pros where host Celeste Lindman is sitting down with a new panel of market professionals to uncover the secrets of Wall Street to help you and your investments stay on top!
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