Evergrande is a Chinese company that has been building entire ghost cities in China for 20 years to keep the country afloat and make them look like they have this great economy. These are cities that are almost completely empty if not totally empty. Cities that are designed for millions to live in and you may have a few thousand people that actually live there. So think of a city like Philadelphia that has a population of 1.5 million. The housing, malls, shopping centers, highways are all there to be able to handle 1.5 million people but there might only be 10,000 people that are actually living there. And this wasn’t just one or two cities either. As of 2019, they had 50 of these cities with a plan to someday move people into them.
At some point this was all going to come crashing down. You can’t keep building entire cities that no one lives in for decades and it be sustainable. That is beginning to catch up with them and when Evergrande falls, it will likely take down the world economy.
Evergrande is in a massive amount of debt. This company alone has 350 billion dollars in debt. 300 billion of that is owed in bonds and the other 50 billion in loans. To put that in perspective, Apple has about 100 billion in debt. But unlike Apple, this company does not earn a profit and it has a market cap of only about 5% of Apple. That is a ton of debt.
Evergrande started issuing bonds but no one in China wanted to invest in a company that builds ghost towns so they opened it up so that everyone could invest in the company. They started getting tons of new investors and now all of these investors are demanding their money back and they can’t come up with the money to pay these investors.
China is now saying that you should be expecting a coming storm because of this. China is now warning of riots, an Occupy Wall Street type of response, a run on the banks and rioters holding executives hostage.
This company is largely owned by Chinese investors but they aren’t going to be the only ones dealing with the fallout of this. You also need to be paying attention to derivatives. Derivative are basically a bet on what the company is claiming they are going to try to do, not on the actual balance sheets of that company. So in this case, this company is building entire cities for people to someday live in but people aren’t living in them and they just keep building more and more. And these bets are on margin, so it’s not even real money. It is far more risky than you having a thousand dollars and investing that thousands dollars into a company that you think is going to produce a great product. So if you are trading on a margin of 50 to 1, you pay only have $1,000 to invest but you are betting $50,000 on this company taking off. Because of these derivatives, the belief is that this company has about $1 trillion of derivatives. If these start to fail, it will likely create a domino effect for other banks in China which will eventually spread to the United States.
In 2008, we saw the collapse of Lehman Brothers which ended up taking down the entire country and bringing the worse recession since the Great Depression. This is looking like their Lehman Brothers and it could take down the world economy. Get prepared for what is coming.