China – Was This the Second Shoe to Fall?
It was reported in late June that China Evergrande Group, which has an enterprise value of approximately $134B, and already owned stock in a small Chinese lender called Shengjiang Bank, more than doubled its ownership in that bank.
The explanation was that China Evergrande Group has nearly $100B of debt outstanding as of December and is very reliant on a stable banking system. But it is highly unusual to see a real estate development company invest in a bank, which makes this increased investment look like a bail-out.
An educated guess is China Evergrande Group (CEG) had such large loans with Shengjiang Bank that CEG had to prop up the bank or face serious problems.
As discussed previously, small Chinese banks have a difficult time raising capital and are limited to making loans typically to non-government owned businesses such as developers.