Evergrande – An Ever-Growing Problem
- Evergrande is crumbling under a mountain of debt.
- Evergrande’s collapse poses a systemic risk to the Chinese and global economy.
- China banning bitcoin again, in this period, may not be coincidental.
- This move may signal bitcoin is a threat to centralised monetary power and a safe-haven asset.
Since its economy liberalised in the late 70s and 80s, the Chinese dragon has come roaring back. It has lifted hundreds of millions of its citizens out of poverty and created nothing short of an economic miracle. This break-neck ascent may be facing one of its biggest challenges to date. China’s policy towards bitcoin, in this period, may be related to this challenge.
The China Evergrande Group was founded in 1996. Evergrande is a result of China’s phenomenal economic growth, as the country underwent a massive process of urbanisation and the company became one of its biggest real estate developers. It is now a “multi-industry and digital technology” conglomerate with operations in eight principal industries. These include real estate, automotive, tourism, sports, health, entertainment, finance and agriculture. Their projects include the “Evergrande Fairyland” theme parks and the world's largest man-made archipelago called Ocean Flower Island. They also own the Guangzhou Football Club, an electric car company, a bottled water company and a streaming entertainment service.
Evergrande has been in the news for much of 2021 because of its property business. By the end of 2020, the Evergrande group managed 565 million square metres of property comprising almost 1,000 projects in 290 cities in China and Hong Kong. It is the second largest real estate developer in China. It incurred vast amounts of debt to grow its core business and diversify away from real estate. Unlike what its website says regarding their “operational model featuring low debt, low leverage, low cost and high turnover”, it is now the most indebted publicly listed real estate company in the world.
As of October 2021, the company has over $300bn in liabilities, which is approximately 2% of China’s GDP. It struggled to make debt repayments of $148m and recently missed three coupon deadlines. The shares of Evergrande and its property services unit have been suspended as of 4 October after crashing 85% this year. Its founder, Hui Ka Yan, who was the richest man in China, saw his net worth fall from a high of almost $40bn in July 2020 to $8bn in October 2021. This is a drop of 80%.
Evergrande owes money to 128 banks and a further 121 institutions, which makes its default and potential collapse of significant concern to the Chinese banking sector and broader economy. Evergrande’s problems have led to global stock market volatility, as investors watch the situation with bated breath. News coming out of Shenzhen has sparked market sell-offs and general panic. The situation has also led Fitch to cut China’s growth forecast and disgruntled investors to protest at its headquarters.
Apart from Evergrande, problems have spread to other companies as well. Another Chinese developer, Modern Land, is struggling, as it requested an extension to fulfil a repayment obligation of $250m in October. The Fantasia Holdings Group, for its part, missed a $206m payment. In addition, Xinyuan will be able to pay just 5% of an upcoming obligation and Sinic will also be missing a payment due in October.
Whereas Evergrande’s liabilities only amount to 0.3% of the Chinese banking system, the Chinese banking sector’s exposure to property is 40%. This means that a widespread problem in the property market could be catastrophic. As it stands, the Chinese government has not announced any plans to bail out the company or take any other measures. They have done something else, however, that may be related. They recently banned bitcoin… again.
China was one of the biggest cryptocurrency markets on the planet. In September 2021, amidst the problems listed above, China banned the use of all cryptocurrencies including bitcoin. This followed a trading ban in 2019, a May and June 2021 ban on financial institutions from dealing in cryptocurrencies and a further ban on mining activities. We are at the 19th ban in the last 12 years. In enacting the ban, the central bank of the People’s Republic of China announced that cryptocurrencies “seriously endangers the safety of people’s assets.” The magisterial irony of this statement, amidst a potentially cataclysmic real estate debt crisis, probably means that the reason for the ban is to be found elsewhere.
It is not impossible to imagine that, when faced with the growing risk of a unique systemic meltdown, the Chinese government, through its central bank, sought to consolidate its monetary power. As we discussed at length previously, government control over money is one of their principal powers. Consolidating that power and eliminating any competition allows greater monetary room to manoeuvre in a looming crisis.
Whereas the market initially interpreted the crypto ban as bad news, sending the price of bitcoin momentarily down, this may actually be fantastic news for the bitcoin community. If bitcoin were irrelevant or had no value whatsoever, as skeptics argue, then it would not be worth banning. Its ban would only create further economic stress in an already precarious situation. Instead, arguably, it is being targeted because it challenges centralised monetary power and has become a safe-haven asset. This means the Chinese government fears it is a challenge to fiat and that investors will flee to it in light of an upcoming crisis. The ban is thus a move to reassert the power of fiat and divert capital back towards government control.
Bitcoin’s comparison to digital gold may be becoming increasingly accurate. Ironically, should the Evergrande crisis expand and spillover, safe-haven assets, like bitcoin, will likely gain in value.