Will the “Evergrande Thunderstorm” destroy Bitcoin?
Is Evergrande about to kill Bitcoin?
Source: Medium
author:New realities
Compiled and arranged by Chen Zou
First is S&P. Then there's Moody's. Then Fitch.
And this morning it was J.P. Morgan.
Now it's hard for anyone to know the big news about Evergrande's thunderstorm; the thunderstorm over the tens of billion dollars collateral problem has made many commentators think that Lehman's mess seems like a slack in comparison to this news. However, it is unlikely that the Chinese regulators will once again make a bailout similar to the one in history.
If Evergrande goes bankrupt, it probably won't take over again. Bitcoin, on the other hand, may be the perfect solution to withstand shocks; it helps prevent a real blow to the Chinese economy.
In order to understand the circumstances, we need to go back a few weeks ago, when Evergrande's lightning actually started detonating:
Evergrande's liabilities involve more than 128 banks and 121 non-banking institutions. J.P. Morgan last week estimated that China Minsheng Bank had the biggest risk exposure to Evergrande.
——Reuters
What is Evergrande, and how did this thunder begin?
Evergrande is one of the world's largest real estate development companies and is listed in Hong Kong. The more formal name is Evergrande Group, a huge Chinese real estate company that has made Xu Jiayin the richest person in China. This national conglomerate is active in technology, automobiles, electric vehicles, consumer goods, tourism, and its core financial and real estate businesses.
It is widely known for using policy guidance and extreme use of highly leveraged capital to obtain huge profits over the years. According to the last count, its total assets are just over $147 billion.
The only problem is that the company's debt-to-asset ratio (leverage ratio) is 6. (Compliance requirements: The leverage ratio should be around 0.3) Naturally, the leverage ratio is too high. As a result, a large number of creditors are currently filing lawsuits.
This sounds manageable in principle, but in the current domestic policy context of deleveraging and curbing housing prices, the problem has taken a turn.
Why did Evergrande face a liquidity crisis?
At the beginning of 2021, the Chinese government tightened credit and capped mortgage loans to prevent a nationwide, multi-billion yuan real estate bubble in its densely populated cities, which are full of young homeowners, but also families facing financial difficulties due to the coronavirus crisis.
This adjustment directly affected real estate sales, but it had the opposite effect. Housing prices did not fall but rose. After 4 months, the government had to step in again to raise mortgage interest rates after housing prices jumped, further reducing the real estate sales rate.
As for the market, investors at Evergrande are weeping. Evergrande Group's stock price fell 60% this year and is currently at a four-year low. All of this happened before the Chinese government asked Evergrande to comply with last month's one-time repayment of 40% of its debt.
But apparently, the debt has not been repaid.
CNBC reports that S&P began credit downgrading the company as early as August.
On August 5, the rating agency downgraded Evergrande and its subsidiaries from “B-” to “CCC” because it is expected that the enterprise group's “risk of non-payment is escalating due to increased asset freezes from various commercial parties, indicating tight liquidity.”
—— CNBC; August 20, 2021
Now let's fast forward a few weeks. Now, the headlines about Evergrande are as much as their cash flow in Xuancheng:
Fitch downgraded Evergrande's credit score to CC (two levels worse than a possible default, extremely bad credit)
Moody's downgraded Evergrande three levels to Ca (meaning the company: “may be at or very close to default)
On the same day that Moody's posted the news, workers at Evergrande allegedly protested that they were not getting their wages, and their employers had no extra cash to pay these salaries at this time.
On September 10, J.P. Morgan Chase lowered its target price for Evergrande shares from $7.20 to $2.80. They are more optimistic about the incident, believing that Evergrande will eventually land softly.
Even if it's a soft landing, it still has to land. This is of little help to investors and partners who are holding a lot of Evergrande bonds in their hands. Their bonds have become a nightmare, and their value is rapidly depreciating.
However, as far as the current domestic policy situation is concerned, the “soft landing” itself is a joke.
How does Evergrande affect the Bitcoin market?
Tether is a stablecoin pegged to the US dollar, known to anyone who is constantly exposed to cryptocurrencies, and its issuer, Tether Limited, is controlled by the owner of Bitfinex and is headquartered in Hong Kong. Tether has been on the cusp of public opinion for several months: Tether's asset reserves have become the emperor's new garment, and investors only know what actually supports these assets, Tether's promises.
Tether was reluctant to reveal too much about the details of their commercial paper (due to non-existent “privacy” issues), but it goes without saying that most of these notes are from China, and Tether also stated that they have never turned down customers who want to redeem them. After keeping quiet about how much leverage stablecoins actually are, 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, that doesn't mean that all of the bonds Tether holds are Evergrande's. Realistically speaking, given the criticism of Tether over the past 12 months, Tehter should have spared no effort immediately to explain to the public that it has nothing to do with Evergrande. But in fact, Tether has been very quiet this month, and some people are starting to make plans. In particular, the development of China's CBDC is helping its “shadow” cryptocurrency economy move away from Tether and Bitcoin, while the government is strengthening control and supervision of the currency at the institutional and consumer levels.
This situation has two outcomes.
Some people think that China will not bail out Evergrande; Evergrande will have to enter the liquidation phase and throw out its holdings in the entire market to clear its bond leverage (this hasn't touched leveraged note debt; we're only talking about leveraged notes) and create market liquidity, causing the prices of Tether and Bitcoin to collapse many times. But everyone has forgotten the other Tether which is not a dollar. Tether, which is pegged to RMB, is a stablecoin currently running on Ethereum, but has yet to officially enter any exchange. But what is this token backed by? How could the Chinese government allow it to exist?
China “saved” Evergrande. They can then use CBDC and bonds to suppress Bitcoin and the dollar (and possibly other fiat currencies such as the Australian dollar, the place where many Chinese products and construction raw materials are dumped) and then sell off Bitcoin and USD/AUD to repay the debt, then the dollar is likely to be under tremendous pressure. For China, this is still a softer but attractive solution because it is a triple win for higher political goals:
1) Decrease citizens' confidence in CBDCs other than the digital yuan. 2) Destroy Tether. 3) Forcing the dollar to depreciate.
How can Evergrande have a lasting impact on Bitcoin?
Most Bitcoin investors have experienced this type of storm. However, if any of these two outcomes occur, we may be facing an unprecedented new storm. If billions of dollars of waste paper and commercial bonds are washed away 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 soaring cryptocurrency prices to cover the gap in fiat debt, and then smash it all back to restore liquidity to the market.
These signals all tell investors to be more careful about the current fact that Bitcoin is an asset, not a currency.
There's an untold adage: if money rules the world, debt is the best weapon.
This article is from Bitpush.News. The source must be indicated for reprinting
