Equity markets fell and the price of Bitcoin (BTCUSD) slid on bankruptcy fears for China Evergrande Group (EGRNF), a Chinese real estate giant and the world's most indebted property developer, on Monday morning. Investors, fearful of a contagion similar to the one that engulfed the global economy during the 2008 housing crisis offloaded risk and sold their holdings across the board.
The Dow Jones industrial Average (DJIA) lost 500 points, its biggest drop since July, after opening. A similar story played out at London's FTSE 100, which registered a sharp drop, falling below 7,000 for the first time since July. The Stoxx Europe 600 Index was down by 2.1%, and Hong Kong's Hang Seng Index fell by 4% during trading.
Meanwhile, the price of Bitcoin had crashed by 10% in a 24-hour span to $42,500 on Monday morning. The cryptocurrency is considered a safe haven from global turmoil by its proponents. At 15:10 PM UTC, Bitcoin was changing hands at $43,651.48, down 8% from its price one day earlier.
- Markets fell and Bitcoin price tumbled on fears of an economic contagion triggered by the collapse of China's Evergrande, the world's most indebted property developer.
- Evergrande owes roughly $300 billion in debt and is the poster child of an overheated Chinese property market.
- Analysts, however, are discounting the prospect of a collapse of the global economy.
- The fall in equity market valuations is yet another opportunity for Bitcoin to prove its worth as a safe haven for investors.
The Housing Giant That Went Bust
Investor worries are focused on the fate of Chinese property developer China Evergrande. The Guangzhou-based company is one of the biggest real estate companies in China. Much of its growth was financed with a debt binge. For example, it borrowed from banks and financial institutions and sold bonds with double-digit interest rates to international investors. It also issued commercial paper to contractors and building material suppliers as payment.
According to reports, China Evergrande owes approximately $300 billion—roughly 6% of the total debt for China’s property sector—to creditors, investors, and other stakeholders. Out of that amount, $89 billion is in loans and bonds, and $120 million is due in interest payments from two bonds this week.
A slowdown in China's overheated housing market this year resulted in a sales slowdown, making it difficult for China Evergrande to pay its suppliers. Pressure has been building up on China's real estate industry for some months now, and Evergrande has become a poster child for the levels of excess debt present in the sector. There were protests outside its offices, and ratings agencies downgraded its debt quality. Chinese banks have also stopped issuing loans to consumers for unfinished Evergrande properties.
A report in The Wall Street Journal about the company details innovative methods that Evergrande is using to pay off creditors. For example, it has paid off a supplier that was owed $34 million in bills with three unfinished properties. Evergrande itself has warned investors of a default. Its stock price has crashed by 87% from the start of the year to $2.28.
The Effect of an Evergrande Default on Mainstream and Bitcoin Markets
By most accounts, Evergrande is a behemoth in the Chinese economy. Apart from real estate, the company also has companies dedicated to the electric car, health care, consumer products, and entertainment industries, among others. It employs 200,000 people directly and creates more than 3.8 million jobs, according to its website.
Given its size, the company's troubles could result in a slowdown in the real estate sector and have a domino effect on the Chinese economy and by extension the global economy. Several recent reports about Evergrande have referred to a potential default as a "Lehman moment," referring to when the storied bank collapsed and set off a series of events that culminated in a global recession.
But analysts say that the chances of a failure that cascades across economies is unlikely. Capital Economics senior analyst Simon MacAdam wrote that "even a messy collapse of Evergrande" will have little global impact beyond market turbulence. "Even if it were the first of many property developers to go bust in China, we suspect it would take a policy misstep for this to cause a sharp slowdown in its economy," he wrote.
Natixis, an investment bank, wrote that the chances of "systemic risks" in China's economy are unlikely because the Chinese government will likely work to avert such an eventuality and avoid negative repercussions in advance of the 2022 National Congress of the Chinese Communist Party.
Neil Wilson, analyst at Markets.com, told Barrons that the current selloff is not a Lehman moment. "What we are seeing today is how risks get priced gradually then suddenly. It is definitely a major cause for investor concern right now and it is possible we see further losses before the dip finally gets bought," he said.
For Bitcoin, its reputation as a safe haven is at stake once again. Cryptocurrency proponents have long touted, without much proof, the absence of price correlation between mainstream markets and cryptocurrencies as a reason for investors to put their money into the asset class.
According to Leah Wald, CEO at cryptocurrency asset company Valkyrie Investments, today's sell-off occurred because traders cashed in their riskier assets to cover margin calls or are waiting until markets calm down. "If ever Bitcoin had the opportunity to establish itself as a safe haven or as digital gold, with U.S. companies also signaling their earnings calls are going to reveal poor results, now feels like the time," Wald told CNBC. Bitcoin price surpassed $50,000 again this month, only to fall back again after the SEC chief reiterated calls for more regulation in the crypto "Wild West."
While China has rescued struggling companies in the past, a bailout with government money may not be on the cards for Evergrande. The authorities have already rejected an earlier plea from company founder Hui Ka Yan. A more likely outcome is debt restructuring. According to a Bloomberg report, the Chinese government is putting together a group of accounting and legal experts to investigate Evergrande's finances and come up with a restructuring plan for its debtors.