Will "Evergrande's Explosion" Destroy Bitcoin?

Written by: new realities
Translated by: Chen Zou

First it was S&P. Then Moody's. Now it's Fitch.

And this morning, it's JPMorgan.

It's hard to find someone who doesn't know about the explosive news regarding Evergrande; the issue of hundreds of billions in collateral has led many commentators to believe that the mess left by Lehman looks like a firecracker compared to this news. Moreover, it seems unlikely that Chinese regulators will take similar market rescue actions as they have in the past.

If Evergrande goes bankrupt, there may not be anyone to take over. Bitcoin could be the perfect solution to withstand the shock, helping to prevent a real blow to the Chinese economy.

To understand the situation, we need to go back a few weeks, when the Evergrande bomb truly began to explode:

Evergrande's liabilities involve over 128 banks and more than 121 non-bank institutions. JPMorgan 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 largest real estate developers in the world, listed in Hong Kong. Its formal name is Evergrande Group, and this massive Chinese real estate company is what made Xu Jiayin the richest man in China. This nationwide enterprise group has businesses in technology, automobiles, electric vehicles, consumer goods, tourism, and its core financial and real estate sectors.

It is well-known for profiting from high leverage capital by exploiting policy directions for many years. In the last tally, its total assets just exceeded $147 billion.

The only problem is that the company's debt-to-asset ratio (leverage ratio) is 6. (Regulatory requirements dictate that the leverage ratio should be around 0.3.) Naturally, such a high leverage ratio has led to numerous creditors initiating lawsuits.

This sounds manageable in principle, but given the current domestic context of deleveraging and suppressing housing prices, the problem has taken a turn for the worse.

Why is Evergrande facing a liquidity crisis?

At the beginning of 2021, the Chinese government tightened credit and set limits on mortgage amounts to prevent a nationwide real estate bubble worth billions of yuan from forming in its densely populated cities, which are filled with young homeowners but also families facing financial difficulties due to the coronavirus crisis.

This adjustment directly affected real estate sales but had the opposite effect, causing housing prices to rise instead of fall. Four months later, the government had to intervene again, raising mortgage rates after a surge in housing prices, further reducing property sales.

As for the market, Evergrande's investors are in despair. Evergrande Group's stock price has dropped 60% this year, currently at a four-year low. All of this happened before the Chinese government demanded that Evergrande comply with a one-time repayment of 40% of its debt last month.

But clearly, the debt has not been repaid.

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

On August 5, the rating agency downgraded Evergrande and its subsidiaries from "B-" to "CCC," as it expected the group's "default risk is escalating due to increased asset freezes from various commercial parties, indicating liquidity stress."

------ CNBC; August 20, 2021

Now let's fast forward a few weeks. Now, the headlines about Evergrande are as numerous as their proclaimed cash flow:

• Fitch downgraded Evergrande's credit rating to CC (two levels worse than a possible default, extremely poor credit)
• Moody's downgraded Evergrande three levels to Ca (indicating the company is likely in or very close to default)

On the same day Moody's released its news, it was reported that workers at Evergrande were protesting for not receiving their wages, while their employer had no extra cash to pay these salaries.

On September 10, JPMorgan lowered its target price for Evergrande's stock from $7.20 to $2.80, taking a more optimistic view of the event, believing that Evergrande would eventually have a soft landing.

Even with a soft landing, it still has to land, which does not help those investors and partners holding large amounts of Evergrande bonds. The bonds in their hands have become a nightmare, rapidly depreciating in value.

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

How will Evergrande affect the Bitcoin market?

Tether is a stablecoin pegged to the US dollar, and those who frequently engage with cryptocurrencies are familiar with it. Its issuer, Tether Limited, is controlled by the owners of Bitfinex and is headquartered in Hong Kong. Tether has been in the eye of public opinion for months: its asset reserves have become the emperor's new clothes, and investors only know a few promises from Tether about what supports these assets.

Tether is reluctant to disclose too much about the specifics of their commercial paper (due to nonexistent "privacy" issues), but it is undeniable that most of these papers come from China. Tether has also stated that they have never refused customers wanting to redeem. After remaining silent about the actual leverage of stablecoins, Tether's executives quietly admitted this summer that half of their currency is backed by bonds.

Although both Tether and Evergrande come from the same place, that does not mean that the bonds held by Tether are all from Evergrande. Realistically, given the criticism of Tether over the past 12 months, Tether should immediately make every effort to explain to the public that it has no connection to Evergrande. However, in fact, Tether has remained very quiet this month, and some people have begun to formulate plans, especially as the development of China's CBDC is helping its "shadow" cryptocurrency economy break free from Tether and Bitcoin, while the government simultaneously strengthens control and supervision over currency at both institutional and consumer levels.

There are two possible outcomes.

• Some believe that China will not bail out Evergrande, and Evergrande will have to enter liquidation, dumping its held assets across the market to clear its bond leverage (this does not yet touch on leveraged note debt; we are only talking about leveraged notes) and create market liquidity, leading to multiple crashes in the prices of Tether and Bitcoin. But everyone seems to have forgotten another Tether that is not pegged to the dollar. The Tether pegged to the yuan currently operates on Ethereum but has not yet officially entered any exchange. However, what supports this token? How could the Chinese government allow its existence?

• China "rescues" Evergrande. Then they can use CBDC and bonds to suppress Bitcoin and the dollar (and possibly other fiat currencies, like the Australian dollar, which is a dumping ground for many of China's products and building materials), and then sell Bitcoin and dollars/Australian dollars to repay debts, which could put significant pressure on the dollar. For China, this remains a softer yet attractive solution, as it serves higher political goals in a three-win scenario:

1. Reducing citizens' confidence in CBDC beyond digital yuan
2. Destroying Tether
3. Forcing the dollar to depreciate.

How will Evergrande have a lasting impact on Bitcoin?

Most Bitcoin investors have experienced storms like this. However, if either of the above outcomes occurs, we may face an unprecedented new storm. If billions of dollars in worthless paper and commercial bonds are washed through Bitcoin, the scale of the impact on Tether, Bitcoin, and Ethereum will be enormous. This means that China could offset their losses by soaring cryptocurrency prices, thereby filling the gap in fiat currency debt, and then dump it all back to restore market liquidity.

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

There is an unknown saying: If money rules the world, debt is the best weapon.