In one of my earlier articles, I have repeatedly recommended the American movie "The Big Short" to readers.
This movie vividly and accurately depicts the fascinating stories of three brave and wise investment teams during the 2008 financial crisis that shook the world, based on real events.
The reason I strongly recommend this movie is that it uses a bloody lesson to tell us a fact that I have repeatedly emphasized in my articles:
Investment often only needs to follow the most basic and simple essence, and not be deceived by its gorgeous appearance, especially not to believe in any so-called "authority."
Today, a similar story is unfolding again. Only this time, it is not happening on Wall Street, but in the real estate market in our country.
The "XXX Daily" detailed in a long article some short-selling events that have been happening in the real estate market in our country since 2016.
The article focuses on two teams.
One of them discovered clues from the sales in a major city in the north of our country, while the other found disturbing signs during an on-site investigation of Evergrande.
In 2016, China was experiencing a booming real estate market.
Parker Quillen, a hedge fund manager from New York, was shocked when he visited a high-end real estate project in the north of our country and found that the sellers were promoting the project based solely on speculation of customer interests without conducting a feasibility study.
Upon returning to New York, he began shorting assets related to Chinese real estate.
At the same time, two accountants from Hong Kong, Gillem Tulloch and Nigel Stevenson, came to mainland China.
As they drove through various parts of China, they were shocked to see vacant buildings and unfinished projects, and investigated 40 projects of Evergrande in 16 cities.
Their conclusion was that many of these assets were "zombie assets," with little or no income.
Even in a port city just a few hours' drive from the North Korean border, Evergrande had a project with six residential buildings. However, the buildings were abandoned, with no workers, residents, or sales staff. Yet, Evergrande still considered the project as a valuable asset on its books.
The accountants also paid special attention to Evergrande's parking garages. They found that many of the garages were almost empty. They estimated that Evergrande had built around 400,000 parking spaces, but had difficulty renting or selling them. However, in the audit report, Evergrande still valued these parking spaces at $7.5 billion, or nearly $20,000 per parking space.
Later that year, the two accountants concluded in their report to their clients that Evergrande was insolvent and its equity was worthless.
Of course, the conclusions reached by these two teams were met with embarrassing feedback from Evergrande, the "authoritative institutions" at the time, and the surging market:
Evergrande strongly countered these conclusions and provided audited financial statements.
The "XX Daily" sternly refuted: Some institutions "lack understanding of (Chinese) companies," and these institutions "exaggerate the potential risks of the Chinese economy and companies," accusing these forces of helping the short-sellers.
Even more ironic is that in the following year, 2017, Evergrande's property sales increased by 11%, and its stock listed in Hong Kong soared by 458%.
Furthermore, international institutions, including numerous top capital firms, seemed to completely ignore these risks and continued to provide funds to Evergrande to purchase its bonds, seemingly unconcerned about whether Evergrande would be able to repay in the future.
These top institutions include Goldman Sachs, Morgan Stanley, BlackRock, Fidelity, and JPMorgan…
A senior executive of a hedge fund later recalled that he was not unconcerned about the risks, but still purchased these bonds. On the one hand, because other companies were buying them, and if he didn't, his short-term performance would lag behind, and he might be fired. On the other hand, faced with Evergrande's still thriving performance and soaring stock price at the time, despite the clear data and logic, few people were willing to believe that the tide would eventually recede.
Even the two Hong Kong accountants who discovered the problems said that although they informed their clients in the report that Evergrande's problems were very serious, the clients seemed indifferent and continued to ignore the risks, sticking to their own ways.
Why do these people ignore the risks even though they know they exist?
Because they all believe in a so-called "fact": the Chinese government will not allow the real estate market to collapse.
Seeing this, I am reminded of a scene in "The Big Short": then Federal Reserve Chairman Bernanke stated in a congressional hearing that there had been no systemic risks in the US real estate market since 1929.
At the time, this statement was seen as an absolute guarantee of confidence by the US financial industry and was used as a golden phrase by Wall Street institutions to mock those who were bearish on the US real estate and financial markets.
In this process, although the first investor Quillen increased his short position on Chinese real estate upon returning to New York, the short-term "abnormal" feedback from the market also caused him unforgettable inner torment.
In his words:
Shorting Chinese real estate stocks is like talking to the devil, who promises that a $10 stock will fall to zero within two years. But what the devil didn't tell you is that in these two years, the stock will first rise to $100 and then fall to zero.
Fortunately, he endured this torment and eventually received a generous return.
This Saturday (May 11th) at 8 p.m., we will hold an online discussion on Twitter. For details, please see the link below:
https://x.com/DaosViews/status/1787331370689446081
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