From Crypto to one of the hottest topics on all financial forums these days - Evergrande, a seemingly similar yet absolutely different version of Evergreen.
Let’s look into this breaking news and its effects on the Crypto market in just 30 sentences below.
The development history of Evergrande
- Evergrande, founded in 1997, is the 2nd largest real estate developer in China. Evergrande specializes in developing large-scale real estate properties in big cities.
- Evergrande currently owns 1,300 real estate properties, with 45 square meters in 280 cities (out of 664 cities) all over China. During its blooming phase, Evergrande expanded its operation to other industries such as food, sports, electric cars, etc.
- Along with the real estate market trend in China, Evergrande had a great explosion in 2017 - 2018, when Evergrande hot stocks went up 500%, which was a real deal in the stock market.
- Evergrande is massive, yet it is also the consequence of an overheated growth. Its debt/equity ratio went up to 6, which, in the Crypto world, means that you are margin trading with x6 leverage. This ratio is only 1 - 1.5 in other companies.
- On Evergrande’s development journey, Mr. Hui Ya Kan - the President of Evergrande Group, became the 3rd wealthiest person in China. However, his asset value is decreasing due to this incident.
The reason behind this collapse
- To rapidly expand in just a few years, Evergrande borrowed a huge amount of money, which led to this $300B debt. Evergrande is currently the biggest high-yield bond issuer in China.
- Borrowing to expand is normal for real estate companies. In the Vietnam stock market, Vingroup also borrowed the maximum limit from multiple domestic banks years ago. Of course, they have been fundraising from other investors these years.
- Real estate companies like Evergrande or Vingroup are considered “too big to fail”.
- However, Evergrande is different from Vingroup: It grew too fast, and Evergrande’s debt/equity ratio is 6 compared to Vingroup’s ratio of 2 (according to the Q2/2021 financial report, see detail here).
- You need to accept the risks and pay your debt when overheating meets the unstable market. All Evergrande’s problems have actually begun in 2020, on the verge of an economic crisis due to the Covid-19 pandemic.
- Until 2021, when the debts are held to maturity and need to be repaid, Evergrande doesn’t have any revenue stream, since the real estate transactions are decreasing and the Chinese government has issued multiple real estate policies limiting the loan sources, while the trust lenders are hesitating due to the market status.
- These problems happening at the same time caused the breakdown.
- The $300B debt is currently an imminent issue for Evergrande.
- To demonstrate how massive the debt is: the 2020 revenue of Vietcombank is approximately $800M.
- In case Evergrande goes bankrupt, this $300B debt goes to the lenders. If 1% of the debt, approximately $3B goes to Vietcombank, how desperate will this company be? In this scenario, Vietcombank needs to operate without revenue in 3.75 years to pay this debt in full.
- Since Vietcombank is the largest financial institution in Vietnam, this example clearly shows that if Evergrande goes bankrupt, any company or institution that issued loans will have to suffer extreme losses. This will of course entail a Domino sequence.
- Therefore, the Chinese government is taking measures to prevent this, including: finishing apartment complexes that received investments from retail investors, selling off the properties they own to investors, etc. In the latest update, People’s Bank of China has injected liquidity into the banking system to stabilize the market. Evergrande has also reached a mutual agreement with lenders to avoid default.
- In the short term, the Evergrande incident has negatively affected the stock market in not only China, but also the world: Nikkei down 2%, Dow Jones dropped 600 points (1.8%), S&P 500 (.SPX) down 1.7% - a record decline in 4 months, Nasdaq Golden Dragon China (.HXC) listed in the USA down 5.4%, etc. In Vietnam, VNIndex also dropped 12 points, down 0.8% on September 21st, 2021.
The effect of Evergrande on the Crypto Market
- When a market in the financial space crashes, there has to be a new cash flow shelter, and everyone will start investing in other seemingly safer, more stable, or low correlation financial products. Cryptocurrency is one of them.
- Overall, the Evergrande incident has negatively affected the stock market in China and all over the world.
- As for the Chinese market, the government has recently issued multiple Cryptocurrency bans, therefore, China no longer has much influence on Crypto.
- As for the global stock market, the statistics from Bloomberg regarding the correlation between Bitcoin and S&P 500 in 2020 shows that the correlation index has always been high, averaging around 0.5, up to 0.8 at times. Meanwhile, in 2021, this index has decreased notably, at 0.2 on average, half of what it used to be. This shows that Crypto has not been moving in the same direction with the stock market as much as before.
- The Correlation index measures the correlation between 2 variables, widely used in finance to help investors diversify their portfolios. Instead of choosing 2 or more assets that have high correlation index (all up or down), they’ll choose to add assets with low correlation index to minimize risks.
- Another negativity during this incident is the FUD about Tether. Tether is a HongKong-based company, in the same market with Evergrande, thus also suffering the Domino impact from this incident.
- In August, Tether published its collateral assets: of $69B in Tether’s market capitalization, $30B was used to buy bonds.
- Although Tether has publicly announced that this $30B doesn’t include that of Evergrande, this incident has caused bond interest rates to rise, thus affecting Tether’s bond more or less due to price decrease. In other words, the Tether collateral will no longer be as certain.
- In the worst case scenario where Evergrande goes bankrupt, the Hong Kong financial market goes into a crisis causing Tether to collapse, how will our market react?
- The cash flow will firstly move to other stablecoins, such as USDC, DAI, UST, etc., raising more chances to invest in stablecoins.
- However, Tether currently accounts for more than 50% of the stablecoin market. The market cap of $69B, if converted to other stablecoins will not be enough, therefore must be converted to high liquidity assets, such as Bitcoin or Ethereum. In this case, the BTC and ETH price will most likely skyrocket.
- Another case is the Tether collapse will result in the collapse of the whole Crypto market, as the investors lose 50% of their cash flow shelter.
The key takeaways of the Evergrande case and its consequences have been summarized in 30 sentences above. What do you think about this incident? Comment down below and discuss further with us.