Old K’s Weekly Talks – Stories from the petrochemical design industry. Post No. 59: Evergrande’s collapse – what are the underlying reasons?

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Old K says every week – Talks about things in the petrochemical engineering design industry, Post 59: Evergrande collapsed – what are the underlying reasons? The recent default by Evergrande appears, on the surface, to be due to poor corporate management and blind expansion; however, the underlying causes are not that simple. My 45th post, titled “The modern corporate system is exploited by those who are bold,” was published on April 25, 2021. The content of that post is as follows: The modern corporate system – namely limited liability companies – while contributing to societal development, is also increasingly revealing its shortcomings. People often hear that having many debts isn’t a problem ； The bold will starve to death, while the timid will die of fear. Now some companies end up with debts of tens of millions, hundreds of millions, billions, or even hundreds of billions. Despite carrying such heavy debts, the owners seem not to worry at all and even appear carefree; the reason is that they have already made the profits they should have made and enjoyed everything they ought to enjoy, and they may even have transferred assets to keep them for themselves. Whether the company survives or not is not their top concern. A tactic often used by bosses is to keep expanding and investing, using new loans to repay old ones, thereby inflating the bubble further and further. Eventually, when the bubble bursts, it leads to massive waste and environmental damage, with the ordinary people being the ones to bear the consequences. Of course, it’s undeniable that some have achieved success this way. One can observe the current situation: aren’t many companies having or undergoing frantic expansion? There are real estate firms such as X Da, X Yuan, X Di, X Chuang, as well as HNA, Qinghai Salt Lake, and even companies that have expanded overseas like XX Ting. It’s not only many private enterprises but also numerous state-owned enterprises that are keen on blowing bubbles; during their tenure in office, some leaders of state-owned enterprises were overly eager to invest in construction projects, and their motives are self-evident. It is suggested that economists spend some time studying ways to improve the modern enterprise system. After reading the above content, do you now have an understanding of the reasons behind Evergrande’s collapse? Evergrande’s debt of nearly 2 trillion has surpassed what ordinary people could imagine, setting a record in China and perhaps even in the world. A statement made by Cao Dewang of Fuyao Glass is thought-provoking: “Evergrande has a registered capital of 3.9 billion, but owes 2 trillion in loans – could it be that the banks made a mistake with the decimal points when learning foreign capital management techniques?” Evergrande and HNA have collapsed; some other companies are on the path to collapse as well, while still others are trying every means possible to borrow money and incur debt in order to move toward collapse. At present, the various refining projects in the petrochemical industry may not be that optimistic either; let’s leave it to time to prove everything. The fundamental reason behind Evergrande’s collapse is actually human greed. Overcoming the weakness of human greed mainly relies on the continuous improvement of systems. Tip: You can enter “Lao K’s Weekly Updates – Talks on Matters in the Petrochemical Design Industry” into the website’s search engine to view previously posted articles