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Evergrande Threatening Global Markets

Evergrande’s default led global stock markets and bitcoin down. But Evergrande is just the tip of the iceberg: Investors and supply chains are anxiously waiting for the actions of the Chinese government.

In Short

Evergrande Threatening Global Markets. The cryptocurrency market dropped to a local low of $1.86 trillion this Monday, September 20, at 13:00 UTC, reflecting a drop of 11% in 24 hours. The decline in the total market value of bitcoin (BTC) and cryptocurrencies, which was $255 billion, coincided with the fall in the rest of the markets, attributed to the crisis of Evergrande, one of China’s largest real estate companies.

While the total market value dropped below $2 trillion this Monday, for the first time since August 19, the price of bitcoin retreated from $47,224 to a low of $42,728, a 9.52% drop in the last 24 hours. The Bitcoin price shows a slight rebound and is trading at $43,600. The market capitalization of bitcoin dropped from $897 billion to $821 billion, the equivalent of an 8.47% decline in the last 24 hours.


Evergrande’s debt crisis

Evergrande is reportedly unable to meet several million-dollar interest payments due this week on a debt exceeding $300 billion. If you divide this huge debt between the Chinese people, they’d have to pay $2500 per person. The fear of the firm’s bankruptcy could drag down the real estate sector throughout China and other Asian countries.

In addition to the company’s share price falling 10% on Monday in Hong Kong markets, the Hang Seng stock index fell 7%. The biggest drop since 2016 spread hours later to European and North American markets, including cryptocurrencies.


Evergrande 1-year market data
Evergrande 1-year market data (Source: Yahoo Finance)

Markets fear that if the Chinese government does not intervene, Evergrande’s liquidity problems could precipitate a wave of bankruptcies and drag down the financial sector that granted many loans to both real estate companies and customers. Evergrande’s debt is equivalent to 2% of China’s Gross Domestic Product (GDP) and equals the entire economy of South Africa.

The Dow Jones Industrial Average (^DJI) index closed Monday down 164 points, or 1.8%, while the S&P 500 (^GSPC) index lost 2.2% and NASDAQ declined 2.1%. For the latter two indexes, it is the most significant drop since May, while the Dow Jones faces its most significant setback since last July, according to Barrons data.


Evergrande is the tip of the iceberg

Evergrande follows Vanke as the largest Real Estate company in China. It ranks 227 in the 2021 Forbes Global List of the biggest companies. There are nearly 120,000 real estate companies in China, and between one and three go bankrupt every day. But that’s not where the risk is. China’s top 25 real estate companies have more than $50B in debt each. The biggest company, Vanke Group, has a similar debt as Evergrande. 

This enormous debt problem gets international since bondholders and investors are mainly from abroad: Blackrock, UBS, Vanguard group, and the Japanese Softbank. There’s also a pension fund from Japan. More than 120 banks from China and abroad invest in Evergrande. Next Thursday (September 23) is the limit to repay part of the debt ($300 million). Some analysts assert that Evergrande cannot even raise $10 million. 

If the company sinks, it’ll affect all of the 120 banks having a stake in it. Not to mention the whole supply chain behind Evergrande: Machinery, building products, elevators, and Telcos. A disorderly default will also affect other companies of the Evergrande Group: Automotive, Travel, Telecom, and a not-so-small list.

The crisis showed signs of its proximity

A Reuters analysis last week exposed the possibility of a global economic crisis if Evergrande defaulted. At that date, China’s largest banks had been notified that Evergrande could not meet payment commitments due this Monday.

Some people, faced with the possibility of such a scenario, suggested bitcoin as a good reserve of value to protect themselves. But, as we have seen, the crypto-asset failed to decouple itself from the stock markets and fell along with them. Something similar happened on the so-called “black Thursday” of 2020, triggered by the health crisis resulting from COVID-19.


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