Update (8/12/21): The Chinese government pumps A$262 billion into the Chinese economy to alleviate expected turmoil from Evergrande and collapses from other Chinese property developers. This was done by reducing the amount of reserves needed to be held by banks.
Update (9/12/21): Evergrande officially defaults. The company has now been placed in the “restricted default” category by Fitch Ratings after failing to pay back A$114 million to bondholders that was due on Monday 6th of December. Fitch Ratings also placed Kaisa, another large Chinese development company, into the “restricted default” category.
Update (17/12/21): Investors uncertain as global markets continue downturn. Crypto stabilises, but shows signs of weakness.
The global financial system is facing one of its worst crises in recent years. The market is closely following the situation at Evergrande and how its default will impact the global economy. Evergrande, one of China’s largest companies, had been staving off default fears for months. However, after failing to repay bondholders in early December, it has now officially been declared to have defaulted. This is one of the largest debt faultings in the world and has had massive ramifications across global markets. Beijing has allowed banks to lower the amount of reserves needed to be able to inject more cash into the economy to mitigate the consequences this collapse will continue to have in the country and abroad.
Crypto as a seemingly speculative asset has also been largely affected. Similar to the major crypto crash of March 2020, cryptocurrency markets tend to largely follow macro markets and macro news. As such, the Evergrande news along with other macro news has seen the overall crypto market cap to begin downtrending with many fearing a bear market is in store.
The Chinese Real Estate Company Struggles
Evergrande was founded in 1996 by Chinese businessman, Hui Ka Yan, in Guangzhou, China. The company has grown over the years to own more than 1300 projects in over 280 cities across China.
Even though it started primarily as a real estate company, Evergrande had been on an expansion spree over the years that cut across various industries. Among its engagements are water bottling plants, wealth management, food production, electric vehicle production and a football team.
The growth of the company coincided with the company founder’s fortune, who at one point was the richest man in China. However, this has dwindled in recent months, just like the company.
Evergrande found itself in trouble due to unmanageable debt. The aggressive expansion by the company was built on top of massive borrowing which totalled over $300 billion. The money came from 171 domestic banks and 121 other financial institutions. It was all good until Beijing introduced a regulation that capped the debt any real estate company could hold. Evergrande had to sell some of its properties at big discounts to ensure a flow of income.
However, it struggled to keep afloat. The Evergrande Group had to suspend its share from trading on October 4. By then it was hoping that the real estate firm Hopson Development would purchase 51% of the shares of its property unit. Both companies had to halt share trading for two weeks while finalising the deal. However, the deal with Hopson Development fell through and both companies resumed share trading.
It was not the best look, as Evergrande shares on the Hong Kong Stock Exchange fell by more than 14%. Even though the company looked to stabilise and avoid further falls, it is has continued to tank.
Why do Evergrande struggles matter inside and out of China?
At first glance, it might seem like the Evergrande struggle is all about the company and nothing more. However, there is more to it. First, China is one of the world’s leading economies and Evergrande is one of the biggest companies in the Chinese economy. The fallout on the Evergrande books has had bigger micro and macroeconomic implications.
Investors were the first to be affected by the Evergrande fall. Most people placed their money on Evergrande through their real estate business. These people were purchasing housing units off plans, meaning they paid before the buildings were put up. They will have little recourse to claim their money.
The fall of Evergrande also has had a massive impact on the international supply chain. As one of the biggest companies in the world, Evergrande has multiple international suppliers, design firms, construction and other partnering businesses. All risk losing money if Evergrande defaults on its payments.
The major impact is on the financial implications. With the national banks and other financial institutions being Evergrande’s main source of debt, the financial fallout from Evergrande is far-reaching, and is why markets around the globe have been affected by the news.
With many banks facing the risk of losing money, it might also lead to a credit crunch. This is a case where the banks have to limit the amounts of money they can give out as loans. It means, most companies risk not having enough money. This would mean slow economic growth rates for China which would also have a reflexive effect on the global economy.
At the moment that company has ceded that there’s no guarantee that it will be in a position to honour all its financial obligations.
Can the Evergrande situation be salvaged?
At the moment, it seems dire for Evergrande. It has already been struggling to make payments to investors of its wealth management and bonds products. It has also missed interest payments to various international investors twice in September.
On the share performance, the company share value has dropped more than 60% in the past 6 months. Already the effects can be felt on the Hang Seng Index, a Chinese company tracking index, which has fallen by 3.3% in its biggest decline since July. This shows the impact is more than just on the Evergrande itself.
Whether Evergrande can regain its financial standing depends on various government policies and any strategic partnerships.
How will Evergrande affect cryptocurrencies?
For a long time, the crypto market operated independently from the other traditional stock exchanges. Bitcoin is likely to replace gold as a safe haven given its resilience in the face of economic turmoil. This came to light following the spreading coronavirus. In the early coronavirus stages, it seemed as though the crypto market was correlated to the traditional stock market. By then Bitcoin had declined to around $4000 by March 2020.
However, as the economy was almost coming to a standstill, Bitcoin and the entire crypto market launched on a bullish run. The run was sustained for more than a year as Bitcoin passed its all-time highs to hit around $65,000 by July 2021.
This bullish run of the crypto market while the stock market also rebounded, showed correlation between the two asset classes. It also hints at how the Evergrande fallout could affect crypto. During the crypto markets bull run, the number of players and investors increased and the acceptance of cryptocurrencies as an asset class became widespread.
Cryptocurrency exchanges also became more prominent as more people were looking to trade crypto assets. Even derivatives like Bitcoin and Ethereum futures were now mainstream. Which led to the crypto adoption by traditional financial institutions.
The entry of institutional investors into crypto is one of the reasons for increased crypto regulations and mainstream adoption. However, with the economy getting hit by the Evergrande fall, most of these institutions will suffer as well. This would mean decreased investments in crypto or withdrawal of money as banks will be limiting the loans due to a potential credit crunch.
As a decentralised market, the crypto market depends on demand and supply for value. A withdrawal of money from crypto investments would mean less demand, and with the same supply in place, most of the tokens would lose value. Therefore, if you have been wondering if Bitcoin is recession proof, you should know it is not yet.
There have also been concerns about the possibility of Evergrande owning some debt in the form of crypto. The stablecoin supplier, Tether, in particular, has been rumoured to be owed money by Evergrande. However, the company has since come out to clarify that it has no relations with Evergrande. Still, given that Tether never opens its financial books for public scrutiny, anything is possible. With the lack of transparency, there is always the concern of will crypto crash?
The crypto market developed to act as an alternative to the traditional economy. It was meant not to have any correlation to it. However, over time the economy has evolved making the crypto market a bigger player. Therefore, any massive changes like the Evergrande fall is a concern. As we have seen with the Evergrande default news, crypto has also been hit hard with altcoins down 30-50% and Bitcoin and Ethereum down 20%. While a recovery is expected by many permabulls, it wouldn’t be unwise to brace for further pain.
