Evergrande

Evergrande has been a hot topic in every business media & its signs of grand collapse lately, triggered a wave of FUD and market unrest across the globe. Let’s take a look at how 1 company can have such a massive impact.

Evergrande is the pioneer in the modern property bubble in China. Residential properties are considered to be the main form of investment. The property market has been in explosive growth even after 96% of the Citizens own at least 1 home compared to 64% in the largest economy, The US. They own more property than bonds or any other asset. Cost of living has been going up proportionally where most of those properties are empty and it has been pure speculation leading to a bubble. 

Evergrande is not just in the property business alone, they own other 1300 projects in 280 cities across mainland China. They employ 200K people directly and 1.8 Mil people in subcontracts. Their expansion has been such that they diversified into investing in Electric cars, Football Team and academy to name a few.

They reached critical mass in 2019 and have been following a steady decline ever since. Evergrande with 300 Billion Dollars worth of debt ranks the top for any real estate company in the world. Bank loans, unsecured debts and commercial paper constituting more than half of the total. On top of that they have taken investments from 1.5 million people for property sale, yet to be built, while operating income has been on the decline, Their share price has fallen 80% this year. 

Many are predicting a pattern of 2008 Subprime mortgage bonds, which could destroy multiple institutions and banks creating a chain reaction of the financial apocalypse.

The Chinese government has a different approach as they already announced Deleveraging positions with Debt repayments and curbing leverages called 3 Red lines.

• Cash on Hand
• Value of Equity 
• Value of assets

If Evergrande falls, the Government would make an example out of it being a moral hazard rather than bailing out.

The crypto connection

We know the crypto market is tied to global macroeconomic factors and equity markets. It would be catastrophic for the majority of Chinese investors as they would have to sell their assets. Bond funds like UBS, Goldman Sachs, BlackRock & HSBC hold a significant amount of shares.

The real elephant isn't Evergrande, but USDT. Tether has been under scrutiny for some time regarding its backing and issuance. Some suspect they hold some of the aforementioned commercial paper from Evergrande. As they had mentioned this year 30 Billion of assets backing those USDT are in commercial papers and certificates. From here things get complicated so much that several scenarios could play out depending on various other scenarios. If Tether holds those bonds, USDT would lose the peg and Exchanges will have a tough time with liquidity as USDT constitutes 56 Billion in volume per day on multiple exchanges.

 Even If a fraction of it loses value when SEC is waiting to crush to nothing, it could be pivotal in the direction of Crypto evolution. However, other factors are indicating a different likely outcome as BlackRock and HSBC invested in Evergrande this August. Chinese commercial banks showing support.  

We are not intending to cause FUD. Instead, an awareness of the risk and how the market may behave irrationally. When in this kind of situation, remember to zoom out and see the larger picture.