A debate has risen on what happens when a large Chinese real estate/lending (real estate is about lending, appreciation, and rent) company fails in the post-Covid global market. We may be seeing a default with stock sell offs at China Evergrande Group that could indicate its on the brink of insolvency. The company appears to be overleveraged and unable to be able to pay its debts (its crashing on itself from a lack of liquidity and complexity). Fox News's article, 'China's Evergrande: What to know' and Bloomberg's 'America’s Corporate Bond Binge Interrupted by Evergrande Tumult' offer some insight into why Evergrande might fail and its implications for world markets if it does (The news appears to show that there was a growing problem for at least the past year reaching back perhaps 10 years.).
If we look at examples in history we will find that very large bedrock real estate/financial institutions that fail can have an impact on the overall stability of other companies within the housing/finance sector and other sectors that hold debt and rely on those services (i.e. contractors). Large defaults can sometimes lead to other associated defaults of suppliers, debt holders, associated businesses following similar strategies, etc... down the economic vine (If you traced companies contracts, debt holdings, executive connections, physical/virtual holdings, etc. you might be able to determine which company(s) might also wobble or fall and in turn what sectors. Theoretically anyway as such information isn't always available. I didn't actually look in this case because its not really the point. It could also show too close a connection between Chinese government officials and corporate executives that didn't allow for proper course correction when it became an issue earlier. Rigidity of strategy, even when its not in the best interest of the company, its shareholders, and public stakeholders could indicate that there are unintended others are realizing the benefits. It will be interesting to see if Chinese officials will probe if/when a massive default occurs and if that info will be public and could that something new. I'm curious how they handle that differently then how we handled Lehman Brothers.) It is believed that the U.S. is somewhat shielded from the brunt of the immediate aftereffects but what happens with China may be something a little different and we can wait and see.
What will be interesting to see is how the same strategy used over and over moves into a downward trajectory (a leverage trap they couldn't get out of) and if such large defaults limit/adjust Chinese expansion strategies in the short run because of other financing issues. China Evergrande is an interesting case to watch and see why they may have used the wrong strategy way too long, the market has shifted under their feet, or could it be a hint China itself is struggling with creating net positive/equilibrium because of a COVID-Trade War-Expenditure-Market imbalances. If you read the Harvard Business Review's 'Seven Ways to Fail Big' discussing large American companies that have failed, they often do so in context of improper strategy to market environment indicating potentially other problems that may not be obvious (There is almost always another layer of "Why?")
It does leave me a kind of question to think about, "How could the U.S. put itself in a position to capitalize on certain market voids and ripples that might occur?" In all situations there are different ways to leverage markets. (At least from what I read) 🤔
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