Bitcoin Serves As Safe Haven For Chinese Impacted By Implosion Of Property Development Giant Evergrande
What Is China Evergrande and Why Is It In Trouble? Bitcoin Serves As Safe Haven For Chinese Impacted By Implosion Of Property Development Giant Evergrande
China Evergrande Group is quickly becoming the biggest financial worry in a country with no shortage of them. With $300 billion in liabilities and links to myriad banks, Evergrande could send shock waves through the financial system and the broader economy should calamity strike.
Its stock price has cratered and its bonds point toward potential default, yet Hui Ka Yan, the billionaire owner, has sought to reassure bankers that the property company will pull through. Investors aren’t sure how. They’re also asking whether major Chinese companies are still considered too big to fail by the central government, which prizes stability — and what happens if they’re not.
1. What’s Evergrande?
Hui founded Evergrande (formerly called the Hengda Group) in 1996 in the southern city of Guangzhou and expanded the real-estate developer, largely by borrowing. Evergrande Real Estate owns more than 1,300 projects in more than 280 cities, according to a company website.
The group now goes far beyond homebuilding, with investments in electric vehicles (Evergrande New Energy Auto), an internet and media production unit (HengTen Networks), a theme park (Evergrande Fairyland), a soccer club (Guangzhou F.C.) and a mineral water and food company (Evergrande Spring), among others. It reported an adjusted core profit of 30.1 billion yuan ($4.7 billion) for 2020, the second annual drop in a row, and revenue missed analysts’ estimates.
2. What Started The Trouble?
The world’s most-indebted developer had a liquidity scare in 2020. Evergrande reportedly sent a letter to the provincial government of Guangdong (Guangzhou is the capital) in August, warning officials that payments due in January 2021 could cause a liquidity crisis and potentially lead to cross defaults in the broader financial sector.
Reports of the plea for help emerged on Sept. 24, sending Evergrande’s stock and bonds tumbling even as the company dismissed the concerns. The letter, which was widely circulated on social media, was verified to Bloomberg at the time by people familiar with it, but Evergrande later disputed its authenticity. Crisis was averted soon after when a group of investors waived their right to force a $13 billion repayment.
3. That Wasn’t Enough?
The reprieve was temporary, as there was still lots more debt coming due later. Evergrande outlined a plan to cut its $100 billion debt pile roughly in half by mid-2023, including a series of assets sales and stock offerings. (The company has some $80 billion worth of equity in non-property businesses, according to Agnes Wong, a Hong Kong-based analyst at BNP Paribas SA.)
4. How’s It Going?
Evergrande has raised about $8 billion this year as of August, selling shares in its EV unit, HengTen, a Hangzhou property firm and a regional bank. It’s also said to be exploring a listing for its tourism business and possibly the water business too. None of those offer quick fixes, however, because any sales probably wouldn’t be completed before next year. Meanwhile, the company’s debt has been repeatedly downgraded; Fitch Ratings said on Sept. 8 that a default seemed probable.
5. What About More Borrowing?
Asia’s biggest issuer of junk bonds hasn’t sold a single dollar note since January 2020 as it looks to reduce its debt load. In any case, Hui’s been under pressure from the government in Beijing to cut borrowing in recent years. But he could still tap fellow tycoons, as he’s done in the past.
He increased financial ties with real-estate empires run by members of the Big Two Club, so-called because of their fondness for a Chinese poker game. In all, the three poker pals were involved in at least $16 billion of transactions with Evergrande over the past decade. Another benefactor emerged in July when Asia Orient Holdings Ltd., led by secretive tycoon Poon Jing, added to its big position in Evergrande bonds.
6. How Much Time Is There?
Not much. It needs to make $669 million in coupon payments through the end of this year. Some $615 million of that is on Evergrande’s dollar bonds, Bloomberg-compiled data show. Next March, $2 billion of Evergrande’s outstanding bonds come due, followed by $1.45 billion the following month. While Evergrande has repaid all its public bonds this year, refinancing in 2022 would be challenging if the developer’s access to capital markets doesn’t recover in time, S&P said.
7. Any Chance Of A Government Bailout?
The central or provincial governments or state-owned enterprises could step in with some sort of lifeline or forced restructuring. Beijing was said to have instructed authorities in Guangdong to map out a plan to manage the firm’s debt problems, including coordinating with potential buyers of its assets. Regulators in September signed off on a proposal to let Evergrande renegotiate payment deadlines with banks and other creditors, paving the way for another temporary reprieve.
8. Why Wouldn’t They Save It, If It’s So Important?
It’s a dilemma. A bailout would tacitly condone the type of reckless borrowing that’s gotten one-time high-flyers like Anbang Group Holdings Co. and HNA Group Co. into trouble too. Ending moral hazard — a tolerance in business for risky bets in the belief that the state will always bail you out — also would make the financial system more resilient over the long run.
But allowing a big, interconnected company like Evergrande to collapse would reverberate across the financial system and also be felt by many millions of Chinese homeowners. Such pain could stir discontent and weaken the Communist Party’s control.
9. Is Hui well-connected?
He seems to be. When President Xi Jinping marked the centenary of the Communist Party’s founding with a fiery speech proclaiming his nation’s unstoppable rise, there, overlooking the festivities in Tiananmen Square, was Hui.
Born into poverty, the son of a wood cutter has been a party member for 35 years and has invested in areas endorsed by the top leadership, such as electric vehicles and traditional Chinese medicine. He’s a prominent philanthropist, although his net worth has taken a beating this year, and his soccer team purchase indicates he shares Xi’s passion for the sport.
Does Evergrande’s $300B Debt Crisis Pose Systemic Risk To The Crypto Industry?
As onlookers predict that top Chinese property developer and commercial paper issuer Evergrande will default, some analysts believe the firm poses systemic risks to crypto.
Amid speculation as to whether China’s second-largest property developer, Evergrande Group, will default on its $300 billion in debts, analysts are wondering whether the firm’s collapse could pose contagion risks for the crypto industry.
On Sept. 8, Fitch Ratings asserted it “appears probable” that Evergrande will default on its debts, with the firm having since conceded that it will be unable to sell properties or other assets in its possession quickly enough to service its rapidly mounting debts.
In a Tuesday statement, Evergrande predicts “significant continuing decline in contract sales in September, thereby resulting in the continuous deterioration of cash collection by the Group” and placing “tremendous pressure on the Group’s cash flow and liquidity.” The document added:
“In view of the difficulties, challenges and uncertainties in improving its liquidity as mentioned above, there is no guarantee that the Group will be able to meet its financial obligations.”
Australian economist David Llewellyn-Smith recently speculated that leading stablecoin issuer Tether may have exposure to commercial paper issued by the “$300bn debt monster,” warning that Bitcoin (BTC) may comprise one of Entergrande’s counterparties through Tether’s (USDT) dominance as a BTC pairing. Tether has denied this, however.
Tether’s latest attestation report suggested $30.8 billion of its $62.8 billion in assets are held in commercial paper, with the Financial Times estimating the company would rank among the instrument’s top 10 holders worldwide.
Despite Tether’s claims that it doesn’t hold any commercial paper issued by Evergrande, Cinneamhain Ventures partner Adam Cochran emphasized that an Evergrande default would “have a huge impact on the commercial paper market” broadly.
Onlookers fear that Evergrande’s collapse could have far-reaching implications for the commercial paper market, with Reuters describing the firm as “the biggest issuer of commercial papers” representing $32 billion worth of the asset as of late 2020.
“Currently both Tether and Circle hold commercial paper, and while I think it unlikely that either would have large swaths of Evergrande bonds, the whole market will reel a bit.”
“I do think both of those will still have more than enough wiggle room to prevent any actual meltdown, but if we have a meltdown that gets really bad, they certainly could get a bit off peg,” he added.
July audits of USD Coin (USDC) issuer Circle revealed that 9% of the firm’s assets were then held in commercial paper.
William Fong, a senior trader at Australian crypto investment firm Zerocap, predicts that Evergrande’s debt crisis will culminate in default and government intervention, suggesting the wholesale economic collapse some onlookers are anticipating is unlikely.
“More likely is that the group goes into administration and the fall is cushioned by the authorities,” he said, adding it’s highly unlikely that Evergrande bondholders will see full repayment.
Fong believes the potential fall-out for the crypto industry, should Evergrande default, remains to be seen, noting that some investors “may diversify away from traditional bond market allocations into less correlated asset classes.”
However, investors “could also shift funding into safe-haven assets such as U.S. Treasury debt,” he added.
Other analysts believe Evergrande is already causing havoc in the international markets, with Bloomberg’s Tracy Alloway noting that yields on junk-rated debt have spiked to their highest level since March 2020.
China Evergrande concerns are rippling through markets after the company halted trading of its onshore bonds,
According to anonymous local sources cited by Bloomberg, China’s Ministry of Housing and Urban-Rural Development has informed banks that Evergrande will not be meeting its repayments this coming week.
The sources claim Evergrande is still exploring whether it can obtain extensions or roll over some of its loans, adding that authorities in Guangdong have rejected a bailout request from the company’s founder.
BTC Holds $48K As Evergrande Forms ‘Lehman Brothers Moment’ For China
Comparisons to 2008 flow in as traditional finance receives a fresh blow from a firm “too big to fail.”
Bitcoin (BTC) cautiously held $48,000 on Thursday as excitement brewed over a boost thanks to China seeing its “Lehman Brothers moment.”
Tether Executive Reassures On Evergrande
Data from Cointelegraph Markets Pro and TradingView showed BTC/USD trading near the $48,000 mark Thursday.
While progress toward $50,000 was less decisive, analysts were broadly hopeful that a debt crisis at China’s second-largest real estate developer would provide much-needed confidence.
Evergrande Real Estate Group (3333.HK) suspended bond trading Thursday, the latest episode in a saga that saw the giant receive multiple ratings cuts.
With $300 billion at stake, comparisons to the 2008 global financial crisis were quick to emerge.
“China’s Lehman moment. The money printing will be massive, I repeat MASSIVE!” PlanB, creator of the stock-to-flow family of Bitcoin price models, told Twitter followers.
“This is good for Bitcoin.”
PlanB was referring to a potential government bailout of Evergrande or the wider-reaching implications of its meltdown, which various sources warn could hit multiple sectors of the economy both inside and outside Beijing’s jurisdiction.
Money printing on a huge scale by central banks previously provided the overture to Bitcoin’s dramatic run-up from lows near $3,000 in March 2020 to all-time highs of $64,500 just over a year later.
Evergrande’s stock traded at 2.63 Hong Kong dollars at the close of trading in Hong Kong Thursday, down from 5.26 HKD at the start of July. At its peak in 2017, it traded above 30 HKD.
The largest United States dollar stablecoin issuer, Tether, meanwhile, publicly confirmed that it had no exposure to the brewing crisis.
Cautious Optimism On BTC Spot
Bitcoin itself showed tentative strength on the day, preserving $48,000 by a hair and, with it, staying above key moving averages on the daily chart.
The cryptocurrency saw a golden cross event this week, its second since August, fuelling hopes that Q4 would in and of itself provide a bull run to a new all-time high.
September, with its predicted “worst case scenario” monthly close of $43,000, should then give way to a minimum of $63,000 in October, PlanB previously forecast.
Evergrande’s Woes Fuel Selloff In Chinese Property Shares
‘Extreme negative sentiment’ grips sector, with a Hong Kong stock index hitting multiyear lows.
A selloff in Chinese property stocks intensified Thursday, as concern mounted about the effects of an official campaign to rein in the sector that has already sparked turmoil at China Evergrande Group.
The Lippo Select HK & Mainland Property Index dropped 4.9%, closing at its lowest level in more than four years, FactSet data showed. The drawdown in property shares helped pull Hong Kong’s flagship Hang Seng Index down about 1.5% to 24667.85, the benchmark’s lowest closing value of 2021.
The 52-stock Lippo Select index is mostly made up of real-estate companies based in mainland China. Including Thursday’s move, it has dropped 23% so far this year, as Beijing has piled pressure on real-estate developers in an attempt to cool the country’s property market.
Some investors worry that Beijing’s deleveraging push will mean more developers run into trouble, and that this could also drag down their associated property-management companies, said Lung Siufung, an analyst with CCB International Securities.
“Some people are losing their nerve,” Mr. Lung said. He said economic data released Wednesday, which also pointed to weakness in the property market, was another factor.
The fact that Beijing has so far refrained from offering help to Evergrande has exacerbated the anxiety, he added, although he said Chinese authorities were unlikely to allow a disorderly unwinding of real-estate debts. On Tuesday, Evergrande said it had hired financial advisers, moving closer to a potential debt restructuring.
The situation at Evergrande has fostered “extreme negative sentiment” toward the whole sector, said William Shek of Zeal Asset Management Ltd., a Hong Kong-based hedge-fund management company.
Both highly indebted companies and those with stronger balance sheets were caught up in Thursday’s selling, with the junk-rated Guangzhou R&F Properties Co. losing 12% and investment-grade-rated peer Shimao Group Holdings Ltd. falling 10%.
Evergrande dropped a further 6.4% and China Vanke Co. lost 3%, while property companies listed in mainland China also declined.
Property-management companies were hit as well. These companies specialize in taking care of apartment complexes and helping residents with issues such as child care, groceries and repairs. The sector has blossomed in recent years, with many developers listing property-services units.
The 30-constituent Hang Seng Property Service and Management Index fell 7.2%, closing at its lowest level since its launch in April. Sector heavyweight Country Garden Services Holdings Co. retreated about 11%.
Mr. Shek at Zeal said that while sentiment was negative on the whole property sector, the property-management companies weren’t directly affected by the government push and their earnings had been very good. “Some of this selling is likely overdone,” he said.
China Adds $14 Billion Cash As Evergrande’s Pain Roils Markets
China injected more cash into its banking system in a sign authorities are seeking to avert a funding squeeze amid a seasonal rise in financing demand and the intensifying debt crisis at China Evergrande.
The People’s Bank of China added 90 billion yuan ($14 billion) of funds on a net basis through seven-day and 14-day reverse repurchase agreements on Friday, the most since February. Today was the first time this month it added more than 10 billion yuan short-term liquidity into the banking system on a single day.
The move comes as the trouble facing China Evergrande Group fuels investor concern over the health of real estate and credit markets. Adding to the stress is a seasonal spike in demand for cash as banks are hesitant to lend toward the end of the quarter ahead of regulatory checks. Liquidity also tends to diminish at this time of year ahead of a one-week holiday at the start of October.
“Avoiding a systemic liquidity squeeze is the absolute priority for the PBOC and it has means to do so,” Societe Generale SA economists led by Wei Yao wrote in a research note. “A Lehman-style financial-market meltdown is not our top concern, but an extended and severe economic slowdown seems more probable.”
Still, the PBOC’s operations have yet to push money-market rates lower. The seven-day repo rate, an indicator for interbank borrowing costs, jumped 14 basis points Friday to 2.4%, the highest since June 30.
Disquiet over Evergrande comes at a time when China’s economy is already slowing. Strict movement controls put in place to curb Covid-19 outbreaks have hurt retail spending and travel, while steps to cool property prices have also taken their toll. On Wednesday, the country reported a sharper-than-expected slowdown in retail sales in August, along with weaker growth in industrial production and fixed-asset investment.
The PBOC is seeking to strike a balance between stimulating the economy and making sure its cash injections don’t result in asset bubbles. Since July, it refrained from adding additional medium-term liquidity as policy loans come due.
On Friday, the central bank injected 50 billion yuan through its seven-day reverse repos, and another 50 billion yuan via 14-day contracts, which haven’t been used since February. Some 10 billion yuan came due Friday.
“It’s fair to say that the Evergrande situation and its repercussions on the broader property market will have a far greater direct impact on Chinese growth than any of the other regulatory crackdowns,” said Alvin Tan, head of Asia foreign-exchange strategy at Royal Bank of Canada in Hong Kong. “I would not be surprised that the PBOC is acting to contain the fallout in the money markets.”
The uncertainty over Evergrande is spurring China watchers to game out potential worst-case scenarios as they contemplate how much pain the Communist Party is willing to tolerate. Pressure to intervene is growing as signs of financial contagion increase.
Numerous industries could be exposed to credit risks if Evergrande was to default, Fitch Ratings warned. It said smaller banks and vulnerable developers would be hurt the most. With more than $300 billion in liabilities, Evergrande’s liquidity stress is stoking worries over the broader Chinese property industry.
Both Morgan Stanley and Goldman Sachs slashed forecasts for the industry citing the potential of an Evergrande default to roil its suppliers, other developers and financial markets.
Much hinges on how big the real-world impact winds up being on the wider property sector, which is key to the Chinese economy. Risks are growing that consumers could retrench further as the company falls behind on promised construction work and faces repayments on wealth management products sold to individuals.
Evergrande Bondholders Find No Takers In Efforts To Hedge Risk
Investors in China Evergrande Group’s bonds are struggling to find a hedge to cushion their losses as the troubled real estate giant nears what could be one of China’s biggest debt restructurings.
Banks’ trading desks are reluctant to offer hedging tools after some of them suffered losses earlier in the year, and due to the sparse trading of Evergrande’s CDS, according to people familiar with the matter who were not authorized to speak publicly about the matter.
Owners of Evergrande’s $19 billion in dollar bonds are currently watching their investment shrivel as they wait to find out if Beijing will step in to halt its downward spiral. For money managers used to relying on the $10 trillion swaps market to hedge downside risks, it’s an extraordinary situation.
“Absolutely no bank is willing to provide a hedge, at least not in size,” Jochen Felsenheimer, a managing director at XAIA Investment in Munich who trades CDS and bonds, said in a phone interview. Both speculators and bondholders are failing to find counterparties to hedge their liabilities, he added.
Credit default swaps are a tried and tested way for investors and hedge funds to profit in the event of a default or government bail-out. While China’s offshore CDS market is illiquid and rarely used, holders of Evergrande’s debt are global, and not being able to hedge for the downside is unusual.
“Banks just don’t want to risk selling protection in case they can’t buy it themselves and they’re left with an open position on their books – and they take the hit,” Felsenheimer added.
Rather than allow a chaotic collapse into bankruptcy, market participants predict regulators will come up with a restructuring of Evergrande’s $300 billion pile of liabilities to stem systemic risk. Any deal would be complicated by the company’s large and multi-layered indebtedness, as well as the ensuing social impact, according to Daniel Fan, credit analyst at Bloomberg Intelligence.