Shanghai-listed Evergrande Group faces an imminent liquidity crisis that will set off a series of events that echo the 2008 Global Financial Crisis.
The China Evergrande Group's debt problem threatens US financial markets in Europe and Japan. The company reported a revenue of 498.8 billion yuan ($83.8 billion) in December 2016. Hurun reports have revealed that Xu Jiayin ranked third among the wealthiest people in China with 290 billion in assets. In addition, Xu was honored as one of 100 outstanding private entrepreneurs at the 40th Anniversary of the "expansion" policy announced by the Chinese Communist Party. If creditors agree to a restructuring, bankruptcy is one option. Still, there is no guaranteed success in such a restructuring process.
China's second-largest property developer Evergrande Group has accumulated billions in massive debt. Two leading creditors will pay interest.
The Implications for Australia
A Chinese property crash would stifle the growth sector of Chinese capital. China is the largest trade partner of Australia, which has had positive effects on Australia's economy, including stock markets and superannuation balance. BHP Group is already down 3% since its peak early last year as its primary product has fallen more than 60 per tonne. Shares are near their record highs, and analysts say any potential stock market move will cause concern for investors. Free-falling stock markets also have the potentially harmful effect of preventing firms from turning away from investments projects and delaying hiring workers.
There are growing fears that China could trigger a credit crunch that could ruin China's international reputation and cause economic problems. It recently announced that its business unit Hengda Group had negotiated with its domestic bond owners on an agreed bonus, enabling the deal to take effect. While this has eased worries of an immediate collapse, the firm could be in trouble later on.
The collapse of Evergrande - as with any giant company of such scale - can be felt in markets of all sizes. China so closely encircles Australia's ASX that the price of iron ore is dropping 60% this year. The billion-dollar debt relating to Evergrande is for retail investors and typical people in China who may see their saved savings deplete if the debts go unpaid.
Risk of Global Financial Crisis
Barclays' China team points out that most of Evergrande's approximately $2 trillion renminbi in debts in China are domestic, unlike Lehman Brothers - global exposure. In addition, banks are planning to contain financial risks compared with their current offerings. "This is an asset developer, not a bank," he adds. We are well aware of how unsafe the international system is now from top to bottom left to right, whereas during Lehmans, there was this assumption that everything would work out fine," he said. And that would make you an issue for bondholders if you went to this level and believed that speculation is the way to go".
According to Shanghai Central Bureau, Xinhua news agency, the outstanding foreign borrowing totals US 2.29 trillion. As of now, in 2018, nearly 40 million dollar debt is owed in emerging countries. China says it has cut off $1 trillion in technology investment from its biggest competitors. The most significant risk is the one in power, with Xi Jinping gaining the greatest influence. It's thought that some big Chinese companies who struggle to comply with their debt obligations will start to lose money soon after the September 2021 crisis. Danielle S. Ecuyer's report suggests that the current situation poses the risk of again major economic crises.
What is Evergrande?
Evergrande Real estate is the owner of more than 1,300 project sites in nearly 280 Beijing cities. It was opened in 1996 by the steel aficionado John Zhang' X' and is today the second-biggest property developer by sales. Forbes magazine said Xu had a family fortune of approximately $10.6bn. It owns Guangzhou FC, its largest soccer team, and also holds its largest property developer Guangzhou. Forbes reported that Xu is also one of China's most affluent business professionals with an estimated $10bn. The industry has also penetrated the sectors of the expanding Chinese economy.
It emerged that Evergrande was facing a problem after years of unrestrained expansion under which debts and assets rose simultaneously. Now the country is trapped with over 300 billion in debt. In addition, developers have also been victims of Beijing's changing way of governing China's economy. In his remarks, Prime Minister Xi Jinping said China could "shift its focus into improving the quality and return of economic growth to pursue genuine rather than inflation-driven GDP."
The Chinese Property Developer is in Debt of More than $300 Billion
China company Evergrande is drowning in debt and is struggling with a hefty debt. Credit rating firm S&P Global says they could default upon millions of dollars in an obligation to creditors. This collapse could potentially bring significant economic implications for Australia, starting with gold prices halved in one month. The Australian government has been losing revenue since the start of the recession when price cuts began. It would mean they could spend less money on services such as Covid relief measures should the virus occur once again with a new variant that may potentially extend the pandemic period.
How This Could Affect Cryptocurrency
No one ever really knew why Evergrande started falling apart. Many suspected that Evergrande's ex-chairman was covering up the actual financial situation, but that is just speculation. Either way, Evergrande can no longer repay its debt.
However, this was not Evergrande's first collapse too. First, Evergrande took on loans to finance Evergrande Zhongcheng, a nearly bankrupt subsidiary of Evergrande. Then they turned around and borrowed more money to make their interest payments which didn't solve the problem.
Now, Evergrande Zhongcheng is in charge of the debt collection. You may recall that Evergrande's subsidiary, Evergrande Zhongcheng was also facing default at the time, so that didn't help things either. The Chinese real estate took out loans only to turn around and give the money to Zhongcheng. Evergrande did this time, and again until eventually, Zhongcheng owed Evergrande nearly 400 million yuan.
Also, Evergrande has been facing troubles in lawsuits, usually to do with ex-chairman Wei. A few months ago, he was sentenced to 18 years in prison after being accused of embezzlement (which is something China doesn't take lightly). In addition, the court fined him 7.5 million yuan.
Legal matters like this aren't the only problems, though; the business also needs to deal with Evergrande City and Evergrande Land. Evergrande City and Evergrande Land are two other subsidiaries belonging to the base Evergrande. It has been accused of raiding Evergrande Land's assets to pay off Evergrande City debts.
In the end, it doesn't matter what exactly happened. The important thing is that the real estate business is now in a state of total collapse. Evergrande can't repay their debts, Zhongcheng's debts, or just about anybody's large debts. Evergrande can't afford to do anything anymore.
The thing about this issue is that it isn't the only developer to ever descend into a state of collapse. China has a history of ever-present developers, ever-growing ever more extensive until they inevitably collapse. Evergrande was simply the latest in a long list of companies lining up to take place.
So what does this mean for cryptocurrency? Well, Evergrande is connected to an extensive network of major projects and businesses. But, alas, if it is to go down completely, the other related industries and businesses will. That includes large companies involved with Bitcoin investments and those that find altcoins (such as VeChain currency and Ripple currency) more valuable than physical gold.
Evergrande Zhongcheng was involved with large banks, especially with Everbright Bank Co., Ltd. Additionally, it was also tied to some of the wealthiest people in China, such as the chairman of Dalian Wanda Group Wang Jianlin. Thus, Evergrande had ties to both banks and major companies, which means ever grande's collapse could affect ever growing an ever-larger number of people.
The Damage So Far
As with any year in September, the Bitcoin market once again fell into a state of correction. Bitcoin dropped down to 15.65% last September 19, marking the end of the bullish streak of cryptocurrencies since July 20, 2021. However, there has been a debacle over crypto investors and traders in social media over whether or not the Evergrande collapse caused the September 2021 crash. Others say it was merely a monthly correction needed for whales to jump out of the bandwagon and welcome new buyers into the market.
Yet, the Evergreene incident was not the only suspect of the big dip in the last two weeks of September. The Chinese government’s latest crackdown also brought in FUD in the market which resulted in huge price corrections.
Since that correction, plenty of altcoins dropped to significant discounts such as the price of Cardano -43% correction which brought the price down from $3.1 to around $1.91. Ethereum dropped from $4,027 to $2,852 and Litecoin from $240 to $153.
However, as of this writing, the market is somewhat recovering from the huge flush. October has always been a friendly year for crypto, however, black swans and FUDs may continue to drive the price of everything downwards.
UPDATE: Bitcoin has hit a new local top of $55,750 as of October 7, 2021 but with an unstable movement pattern.
How China Influences the Bitcoin Price
Remember, a large portion of BTC miners hail from China. So, when the crackdown happened last June 2021, the price of Bitcoin went into a downward spiral. This drove the prices into a state of decline, starting from the $43,000 zone down to this year’s lowest of $29,278. With the recent news on Evergreene and the Chinese government stating that cryptocurrency has no value, you can see how much FUD the country can cause in the global market.
How is China’s market affecting the current bitcoin price AUD and everywhere around the world?
Bitcoin has gained popularity among investors looking for alternative assets to buy and sell. After all, a new generation of investors considers a purely digital currency with no central governing authority. 13% of bitcoin is held by people based in China. Still, the Chinese are facing issues with sending this money abroad due to domestic regulation. This limits the potential for bitcoin investing outside of China because if Chinese investors pull out their investments, that will create a massive loss for bitcoin.
Altcoin investors and traders may also find themselves stuck in a rut as long as Bitcoin dominance remains strong. However, this global financial crisis may also test altcoins as well, given that their values may just stand against the current events. This would make alternatives such as Ethereum currency, Ripple and The People’s Reserve get the chance to prove their worth and show that their designs help people get out of a collapsing system.
Is This the Lehman Brothers Part 2?
This is where Evergrande comes into play: the real estate company is falling at an ever-increasing rate due to its massive size. Evergrande is so big that it can significantly affect bitcoin if the business were to go bankrupt. Furthermore, analysts have predicted that Evergrande will be the first-ever trillion-dollar company ever. Hence, there is much potential for Evergrande to become even more prominent - given that the company can save itself.
This would have caused many people to want to invest in Evergrande. They saw it as an opportunity to get into the next ever trillion-dollar company. This could have led Evergrande to become even more significant than it already is. Yet, since its recent crash, the FUDs do not just strike in cryptocurrency but the stock market as well.
Many investors are now starting to question Evergrande's stability. The heavy scrutiny of financial analysts has brought new doubts and fears into the hearts of its shareholders. This would affect the market because many people would need to sell some of their Evergrande stocks for others to buy Evergrande stocks. Thus, it would create a severe case of Evergrande inflation.
The Evergrande inflation could cause the value of many cryptocurrencies to fall, which means that smaller investors and traders may see this as an opportunity. Yet, the situation could remain unchanged if the large bulls won't ever dip their feet into the Evergrande water.
Without a doubt, China boasts a big influence in both the crypto and stock markets. If the Evergrande collapse has a domino effect on the rest of its networks, the rest of the corporations may follow suit. Traders who would short-sell on this situation will make fortunes and current homeowners may find themselves living in a shack under a bridge. This current fear replicates the 2008 financial crisis and if the Chinese government and other corporations cannot help out Evergrande, it will directly affect millions of people - not just in China but in major countries involved with the mainland Chinese businesses.