Evergrande’s debt crisis looms large over markets and extends beyond real estate.
The financial world is keeping a close eye on Evergrande and what is going on in China, as this has undoubtedly been the focus for the past few weeks. Today, global markets plummeted as the Evergrande stock price fell another 10%, sending Bitcoin into the red with a drop of around 8% in the last 24 hours alone. Is the agony, however, over?
Evergrande is a Chinese real estate behemoth that has sagged. Evergrande has managed to become one of China’s leading real estate companies. It is said to have developed over 1,300 projects in over 280 Chinese cities, and it also owns one of the country’s largest football teams, Guangzhou FC.
It did so by borrowing more than $300 billion from 171 domestic banks and 121 other financial institutions. However, last year, Beijing implemented new rules that limit the amount of money owed by large real estate developers, prompting Evergrande to offer its properties at significant discounts.
The company did this to ensure that there is enough money coming in to keep the business running. However, it is currently struggling to meet its debt interest payments, and it is unclear whether Beijing will bail it out.
Why Is It Important Both Inside and Outside of China?
China has the world’s second-largest economy, and Evergrande is one of the country’s largest corporations. Complicated macro and microeconomic postulates come into play when it comes to the influence that Evergrande’s potential fallout might have on the world’s economy.
There are at least a few reasons why these issues are serious and must be addressed. Right away, many people purchased properties from Evergrande before the company began construction, and they may lose the money they put down as deposits if things go wrong.
Furthermore, the company has an international supply chain and does business with many firms all over the world, including construction and design firms, suppliers, and so on, all of which face significant financial risks if Evergrande defaults.
Third comes the impact on the country’s financial situation. Mattie Bekink of the Economist Intelligence Unit (EIU) spoke on the matter, outlining Evergrande’s above connections: The financial ramifications would be far-reaching. 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 (including financial institutions and banks) may be forced to lend less and raise interest rates, causing problems for other businesses. Some of them rely on debt to thrive, and in some cases, they may be unable to function without it.
The Impact Is Already Visible
Evergrande’s stock has dropped by more than 80% in the last six months, and the company’s shares have dropped by more than 10% today alone.
This has also caused a broader dip in the Hang Seng Index – an index tracking major Chinese companies, to decrease by 3.3 percent – its biggest loss since late in July. This demonstrates that property fears are spreading beyond Evergrande. Furthermore, global markets fell during pre-market trading hours. The S&P500 futures are down 1%, as are the DOW and NASDAQ futures.
Bitcoin is a high-risk investment. In fact, because of its unconventional nature and sporadic market behavior, which is frequently nothing short of unpredictable, it is one of the riskiest assets. And, while investors with a higher risk tolerance may seek exposure to it in order to maximize gains, it is unlikely that BTC will be what they hold during the turbulent times of a looming financial crisis.
Furthermore, when there is turmoil in the broader financial markets, Bitcoin has historically been quite shaky – a further argument in favor of the preceding. As a result, it is entirely possible that the market will remain indecisive until China’s property fears are alleviated in some way.
But it’s also worth noting that this doesn’t just apply to Bitcoin but to other risk assets as well. When the economy is shaky and the dollar is rising, they are the first to liquidate. Of course, Bitcoin should be considered an uncorrelated asset because it differs fundamentally from traditional assets. However, this has not been the case, owing in large part to large institutions stepping in and becoming a significant part of the market.
Also Read: Binance Is Being Investigated By The US Government
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