Citron Research founder Andrew Left was feeling a modicum of vindication on Monday, as China’s Evergrande looked to be on the brink of collapse, sending shock waves through financial markets.
“Yeah, I feel vindicated,” he told MarketWatch, in a phone interview on Monday.
Back in 2012, Left accused the prominent property developer of engaging in aggressive accounting practices and charged that it was actually insolvent, based on his research.
Read: Evergrande isn’t the only reason the stock market is headed for its worst day in 2 months. Here are 5 other reasons
Left said that China’s second-largest property developer’s balance sheet hasn’t changed very much since his original analysis of its problems, aside from the scale of the issues.
“Nothing has changed in the 10 years since that research…I just identified when the problems started,” Left told MarketWatch.
Evergrande 6666, -11.30% is nursing more than $ 300 billion in debt and holders of Evergrande’s approximately $ 19 billion in dollar-denominated bonds are left to wonder what will become of their investments, while Wall Street attempts to gauge the potential spillover effects a collapse could have on China’s property sector and global financial markets.
Left, however, sees the problem as likely one that will be contained by dint of China’s nature of controlling its economy and propensity to bail out embattled companies.
“So, they are going to do whatever they have to do” to contain the harm to the broader economy and limit spillover, Left explained. He said that investors here, however, aren’t likely to observe the wheels within the Chinese machinery moving because of Beijing’s tendency to operate behind a veil when it comes to business matters.
As The Wall Street Journal described it in a Friday article, China’s Evergrande Group turned billions of dollars in borrowed money “into the dream of homeownership for millions of Chinese citizens.”
However, that dream was funded on outsize loans that are coming due soon.
Evergrande faces an $ 83.5 million interest payment Sept. 23 on its March 2022 bonds and a $ 42.5 million payment on Sept. 29 on its March 2024 notes, according to news reports. Failure to settle those payments within 30 days of their due date would put Evergrande in default.
S&P Global Ratings on Monday said a default by Evergrande would cause more than mere ripples in financial markets, but would be unlikely to lead to a tidal wave of defaults.
Left believes that a likely intervention by China in Evergrande will limit any spillover, preventing potentially harmful ripples throughout global markets, he speculated. “They’ll just take more control of it,” Left said of China’s government regarding Evergrande. “It’s not a contagion event,” he said.
Almost a decade ago, the Citron Research founder was banned from trading in Hong Kong markets after losing a civil case against regulators related to his allegations about Evergrande. The legal dispute lasted more than half a decade and cost him millions.
Left said that his ban from the Hong Kong market lifts next month but it isn’t clear that he will do much investing there in any event.
“I got a complete black mark on me for saying everything that’s already turned out to be true,” he was quoted as saying in Institutional Investor last month. “It’s Hong Kong’s attempt to stifle the truth. They knew it was going to happen, but they didn’t need a short seller to say anything about it.”
Left told MarketWatch that part of the reason he believes that Evergrande has been allowed to become so highly levered is because of the prominence of its Chief Executive, Hui Ka Yan, who founded the company in 1996 in Guangzhou as Hengda Group.
“Obviously, China is overbuilt,” Left said of China’s property market. “But I think it is a problem that they let this guy run wild,” he said of the Evergrande CEO.
Hui boasts 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 last month reported that Hui stepped down as chairman of the closely held Hengda Real Estate Group, in a reshuffling that “raised concerns about his grip on his flagship China Evergrande Group.”
Worries about Evergrande were being blamed for a broad selloff in the market that saw the Dow Jones Industrial Average on track for its worst daily fall since Oct. 28, 2020, according to data compiled by Dow Jones Market Data. The S&P 500 index SPX, -2.68% and the Nasdaq Composite Index COMP, -3.23% were also unraveling, down by 2.7% and 3.2%, respectively, Monday.