Will Evergrande’s bankruptcy destroy Bitcoin?

Is Evergrande about to kill Bitcoin?

Source: Medium

Author: new realities

Compiled and edited by Chen Zou

First came S&P. Then came Moody's. Then came Fitch.

And this morning it was JPMorgan Chase.

It is hard to miss the news of Evergrande’s collapse; the collapse of tens of billions of collateral problems has made many commentators think that Lehman’s mess looks like a piece of cake compared to this news. And this time, Chinese regulators are unlikely to make similar rescue actions as in the past.

If Evergrande goes bankrupt, there may be no one to take over. Bitcoin may be the perfect solution to withstand the shock, helping to prevent a real blow to the Chinese economy.

In order to understand the whole story, we need to go back a few weeks ago, when the Evergrande bomb really began to explode:

Evergrande's liabilities involve more than 128 banks and more than 121 non-bank institutions. JPMorgan Chase estimated last week that China Minsheng Bank has the largest risk exposure to Evergrande.

Reuters

What is Evergrande and how did this bomb start?

Evergrande is one of the world's largest real estate developers and is listed in Hong Kong. More formally known as Evergrande Group, this giant Chinese real estate company is what made Xu Jiayin the richest man in China. The national conglomerate has businesses in technology, automobiles, electric vehicles, consumer goods, tourism, as well as its core financial and real estate businesses.

It is widely known for its use of policy guidance and high leverage capital to make huge profits over the years. At the last count, its total assets were just over $147 billion.

The only problem is that the company's debt-to-asset ratio (leverage ratio) is 6. (Compliance requirements require the leverage ratio to be around 0.3) Naturally, the excessively high leverage ratio has led to a large number of creditors filing lawsuits.

This sounds manageable in principle, but in the current domestic policy context of deleveraging and curbing housing prices, the problem has become distorted.

Why did Evergrande encounter a liquidity crisis?

Beijing tightened credit and capped mortgage amounts in early 2021 to prevent a nationwide, multibillion-yuan real estate bubble from forming in its densely populated cities, which are filled with young homeowners but also families facing financial constraints due to the coronavirus crisis.

This adjustment had a direct impact on real estate sales, but it had the opposite effect, with house prices rising instead of falling. Four months later, the government had to intervene again, raising mortgage rates after house prices jumped, further reducing the property sales rate.

As for the market, Evergrande investors are already crying their eyes out. Evergrande Group's shares have fallen 60% this year and are currently at a four-year low. All of this happened before the Chinese government asked Evergrande to comply with the one-time repayment of 40% of its debts made last month.

But apparently, the debt has not been repaid.

CNBC reported that S&P began downgrading the company's credit as early as August.

On August 5, the rating agency downgraded Evergrande and its subsidiaries to "CCC" from "B-" as it expected the conglomerate's "non-payment risk is escalating as asset freezes from various business parties increase, indicating tight liquidity."

—— CNBC; August 20, 2021

Now let’s fast forward a few weeks. Now, Evergrande is making as many headlines as they do about their cash flow:

• Fitch downgraded Evergrande's credit rating to CC (two levels worse than possible default, extremely bad credit)

• Moody's downgraded Evergrande by three levels to Ca, which means the company is "likely to be in or very close to default."

The Moody's announcement came on the same day as workers at Evergrande reportedly protested that they had not been paid, at a time when their employer did not have the spare cash to pay them.

On September 10, JPMorgan Chase lowered its target price for Evergrande shares from $7.20 to $2.80. They were more optimistic about the event and believed that Evergrande would eventually have a soft landing.

Even if it is a soft landing, it still has to land, which is of no help to investors and partners who hold a lot of Evergrande bonds. The bonds in their hands have become a nightmare, and their value is rapidly depreciating.

But given the current domestic policy situation, "soft landing" itself is a joke.

How will Evergrande affect the Bitcoin market?

Tether is a stablecoin pegged to the US dollar. People who often come into contact with cryptocurrencies know that its issuer, Tether Limited, is controlled by the owner of Bitfinex and is headquartered in Hong Kong. Tether has been at the center of public opinion for months: Tether's asset reserves have become the emperor's new clothes, and what these assets are backed by, investors only know a few promises from Tether.

Tether won’t reveal much about the exact contents of their commercial paper (due to non-existent “privacy” issues), but it’s clear that most of it is from China, and Tether says they’ve never turned away a customer who wanted to redeem it. After remaining mum about how much leverage their stablecoin actually has, Tether executives quietly admitted this summer that half of their currency is backed by bonds.

Although Tether and Evergrande both come from the same place, this does not mean that all the bonds held by Tether are Evergrande's. Realistically speaking, given the criticism of Tether over the past 12 months, Tehter should have immediately gone to great lengths to explain to the public that it has no involvement with Evergrande. But in fact, Tether has been very quiet this month, and some people are beginning to make plans, especially as the development of China's CBDC is helping its "shadow" cryptocurrency economy get rid of Tether and Bitcoin, while at the same time the government is strengthening control and supervision of the currency at the institutional and consumer level.

This situation has two outcomes.

• Some people believe that China will not bail out Evergrande, and Evergrande will have to enter a liquidation phase and sell its holdings across the market to liquidate its bond leverage (this does not yet touch the leveraged note debt; we are talking about only leveraged notes) and create market liquidity, causing the price of Tether and Bitcoin to collapse several times. But everyone forgets that there is another Tether that is not the US dollar. Tether, which is pegged to the RMB, currently runs on Ethereum but has not officially entered any exchange. But what is this token backed by? How could the Chinese government allow it to exist?

• China "rescues" Evergrande. They can then use CBDC and bonds to depress Bitcoin and the USD (and possibly other fiat currencies like the AUD, a dumping ground for many Chinese products and construction raw materials), then sell Bitcoin and USD/AUD to pay off the debt, then the USD is likely to come under significant pressure. This is still a softer but attractive solution for China, as it is a win-win-win for higher political goals:

  1) Reduce citizen confidence in CBDCs other than the digital yuan. 2) Destroy Tether. 3) Force the dollar to depreciate.

How will Evergrande have a lasting impact on Bitcoin?

Most Bitcoin investors have experienced these types of storms. However, if either of the above two outcomes occurs, we may be facing a new storm that has never been seen before. If billions of dollars of waste paper and commercial bonds are washed through Bitcoin, the scale of the impact on Tether, Bitcoin, and Ethereum will be huge. This means that China can make up for their losses by surging cryptocurrency prices to make up for the gap in fiat debt, and then smash it all back to restore liquidity in the market.

These signals are telling investors to be more cautious about the fact that Bitcoin is now an asset, not a currency.

There’s an untold adage: If money rules the world, debt is the best weapon.