China Evergrande (HKG: 6666) (OTC: EGRNF) shares are down 95%. The fall here though means pretty much nothing, really nothing at all. For the quote in Hong Kong remains suspended, it's only the OTC quote in the US that has moved. And volumes there are so tiny that it's difficult to even claim this is a price. EGRNF might trade 30,000 shares in a day at present - we're not even certain whether that's $1.20 total value or $12 total value. It's not even possible to find a market maker to gain a quote in the stock.
The background to all of this is that, as we know. Evergrande went bust. Well, to all intents and purposes it did. Defaulting on foreign bonds and so on - that's bust in any market less government controlled than that in China. So, the question then becomes, well, how bust? Are we talking of a cashflow issue in which case there might be some residual for stockholders? Or perhaps we're closer to a Chapter 7 liquidation in which there's nothing left over. Further, how is the Chinese government going to distribute this pain? And yes, it is going to be a political decision about that, have no fear or doubt about it.
China Evergrande stock price from OTC
The news here is that China Evergrande has now released its well past due results: “Chinese property developer Evergrande has posted losses of $81bn over a two-year period, revealing for the first time the financial fallout of a 2021 default that sparked an ongoing crisis in the country's property sector.” That there were such losses is not a surprise - the bond defaults mean we know they were horrible. But as horrible as this? “The company reported a loss attributable to shareholders of 105.9 billion yuan ($14.8 billion) for the full year in 2022, adding to a 476 billion yuan loss the previous year,” yes, as horrible as that apparently.
Given that we can't invest - nor go short - in China Evergrande (and forget the OTC quote, not enough volume there to be able to do anything) why the interest? Because what the Chinese Government does about this will tell us much more about the likely future state of the Chinese economy. It's possible that they'll pursue a purging, a proper bankruptcy and impose losses on stock and bond holders. While that would cause great pain we could take it as a Hayekian cleaning of the slate. Or, there's the possibility that they'll try to muddle through, perhaps supporting domestic investors while doing over foreign. That would indicate that there are going to be further problems down the road - for the Chinese economy does risk being strangled by the past malinvestment, something that does need to be purged. China Evergrande is obviously not a good - not even possible - investment at present, But it is a bellwether.
