• The Chinese Evergrande Debt Crisis and What It Means for Bitcoin

  • The financial world is keeping a close eye on Evergrande and what’s going on in China, as it’s been the talk of the town for the past few weeks.

    Today, global markets tumbled as Evergrande’s stock price dropped another 10%, sending Bitcoin into the red with a drop of around 8% in just the last 24 hours. Is the suffering, however, over?

    Sags Evergrande, China’s Real Estate Behemoth

    Evergrande has risen to become one of China’s most powerful real estate companies. It is said to have developed over 1,300 projects in over 280 Chinese cities and is also the owner of Guangzhou FC, one of the country’s largest football teams.

    It was able to do so by borrowing more than $300 billion from 171 domestic banks and 121 other financial institutions. Last year, however, Beijing enacted new rules limiting the amount of money owed by large real estate developers, prompting Evergrande to discount its properties significantly.

    This was done to ensure that enough money was coming in to keep the company afloat. However, it is currently unable to meet its debt interest payments, and it is unclear whether Beijing will bail it out.

    Why Is It Important Both Inside and Outside China?

    China is the world’s second-largest economy, and Evergrande is one of the country’s most powerful corporations. When it comes to the impact that Evergrande’s potential fallout might have on the global economy, complicated macro and microeconomic postulates come into play.

    There are at least a few reasons why these issues are serious and should be addressed. Many people bought properties from Evergrande before the company began construction, and they may lose the money they put down as deposits if things go bad.

    Furthermore, Evergrande has an international supply chain and does business with a variety of companies around the world, including construction and design firms, suppliers, and others, all of whom face significant financial losses if Evergrande defaults.

    The impact on the country’s financial situation is the third factor to consider. Mattie Bekink of the Economist Intelligence Unit (EIU) spoke on the subject and outlined Evergrande’s above connections:

    The financial ramifications would be enormous. Evergrande is said to owe money to 171 domestic banks and 121 other financial institutions.

    The so-called credit crunch is one of the major concerns. If the company defaults, its lenders (financial institutions and banks) may be forced to lend less and raise interest rates, which would be bad news for businesses. Some of them are reliant on debt to grow, and in some cases, they may be unable to function without it.

    Evergrande’s stock has dropped by more than 80% in the last six months, and the company’s stock has dropped by more than 10% today alone.

    This has also resulted in a 3.3 percent drop in the Hang Seng Index, which tracks major Chinese companies. This is the biggest drop since late July. This demonstrates that property fears are not limited to Evergrande.

    Furthermore, during pre-market trading hours, global markets plummeted. S&P500 futures, as well as DOW and NASDAQ futures, are all down 1%.

    What Will Become of Bitcoin?

    Bitcoin is a high-risk investment. Indeed, it is one of the riskiest assets due to its unconventional nature and sporadic market behavior, which is often nothing short of unpredictable. While investors with a higher risk appetite may seek exposure to it in order to maximize profits, it’s unlikely that they’ll hold BTC through the turbulence of a looming financial crisis.

    Furthermore, when the broader financial markets are in turmoil, Bitcoin has historically been quite shaky – a further argument in favor of the above.

    As a result, it’s entirely possible that the market will remain indecisive until the property fears emanating from China are resolved in some way.

    It’s worth noting, however, that this isn’t limited to Bitcoin; it also applies to other risky assets. When the economy is shaky and the dollar is rising, they are the first to sell.

    Because Bitcoin is fundamentally different from traditional assets, it should, of course, be an uncorrelated asset. However, this has not been the case, owing to large institutions entering the market and becoming a significant player.

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