Evergrande’s potential debt explosion is ‘not a contagion event’ for the stock market, says man who said company was insolvent 10 years ago



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Citron Research founder Andrew Left felt minimal justification on Monday as China’s Evergrande appeared to be on the verge of collapse, sending shockwaves through financial markets.

“Yes, I feel justified,” he told MarketWatch in a telephone interview on Monday.

In 2012, Left accused the prominent real estate developer of engaging in aggressive accounting practices and accused him of being in fact insolvent, based on his research.

Read: Evergrande isn’t the only reason the stock market is heading for its worst day in 2 months. Here are 5 other reasons

Left said the record for China’s second-largest real estate developer has not changed much since its initial analysis of its problems, other than the scale of the problems.

“Nothing has changed in the 10 years since this research… I just identified when the problems started,” Left told MarketWatch.

Evergrande 6666,
-11.30%
has over $ 300 billion in debt and holders of about $ 19 billion of Evergrande’s dollar-denominated bonds wonder what will happen to their investments, as Wall Street tries to assess the effects of potential drag that a collapse could have on the Chinese real estate sector and global financial markets.

Left, however, sees the problem likely to be contained due to China’s nature of controlling its economy and its propensity to bail out struggling companies.

“So they’re going to do whatever they have to do” to contain the damage to the wider economy and limit the fallout, Left explained. He said investors here, however, are unlikely to observe the cogs of the Chinese machinery in motion due to Beijing’s tendency to operate behind a veil when it comes to trade matters.

As the Wall Street Journal described in a Friday article, Chinese group Evergrande turned billions of dollars of borrowed money “into a homeownership dream for millions of Chinese citizens.”

However, this dream was funded by oversized loans that are coming due soon.

Evergrande faces an interest payment of $ 83.5 million on September 23 on its March 2022 bonds and a September 29 payment of $ 42.5 million on its March 2024 notes, according to articles from hurry. Failure to settle these payments within 30 days of their due date would put Evergrande in default.

S&P Global Ratings said on Monday that an Evergrande default would cause more than just ripples in financial markets, but it likely wouldn’t lead to a tidal wave of defaults.

Left believes that a likely Chinese intervention in Evergrande will limit any spillovers, preventing potentially harmful ripples in global markets, he speculated. “They’re just going to take more control of it,” Left said of the Chinese government regarding Evergrande. “It is not a contagion event,” he said.

Almost a decade ago, the founder of Citron Research was banned from trading in Hong Kong markets after losing a civil case against regulators over his Evergrande allegations. The legal dispute spanned over half a decade and cost him millions.

Left has said his ban on the Hong Kong market will be lifted next month, but it’s not clear he will invest much there anyway.

“I got a full black mark on me for saying everything that has ever turned out to be true,” he told Institutional Investor last month. “This is Hong Kong’s attempt to cover up the truth. They knew it was going to happen, but they didn’t need a short seller to talk about it.

Left told MarketWatch that part of the reason he thinks Evergrande was allowed to become so heavily in debt is due to the importance of its chief executive, Hui Ka Yan, who founded the company in 1996 at Guangzhou under the name of Hengda Group.

“Obviously, China is oversized,” Left said of the Chinese real estate market. “But I think it’s a problem that they let this guy run wild,” he said of the CEO of Evergrande.

Hui has a personal fortune of around $ 10.7 billion, according to Forbes. Hui took Evergrande public in 2009 and he owns the majority of the company, according to reports.

The South China Morning Post reported last month that Hui had stepped down as chairman of Hengda Real Estate Group in a reshuffle that “raised concerns over his hold over its flagship China Evergrande Group.” .

Concerns over Evergrande were blamed for a wide sell-off in the market that saw the Dow Jones Industrial Average on track for its worst daily drop since October 28, 2020, according to data compiled by Dow Jones Market Data. The S&P 500 SPX index,
-1.70%
and the Nasdaq Composite Index COMP,
-2.19%
were also unraveling, down 2.7% and 3.2%, respectively, on Monday.

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