As part of the upcoming nationalization of Evergrande, officials are starting to take a more hands-on role at Evergrande. Chairman Hui was summoned by the Guangdong government last week after the company said it plans to work with creditors on a restructuring plan. The company on Monday said state representatives have taken the majority of seats on a new risk management committee.
So far, containment efforts haven’t assuaged investors. While pain has so far largely been contained to China’s smaller offshore credit market, that’s little consolation for developers that have relied heavily on international investors to raise funds. Borrowing costs have spiked, weak balance sheets and contagion to Kaisa and Fantasia Holdings Group Co. are happening.
In total, Bloomberg calculates that Chinese borrowers have defaulted on a record $10.2 billion of offshore bonds this year, with real estate firms making up 36% of that.
“There is extreme stress in the market,”, said Jenny Zeng, co-head of Asia Pacific fixed-income at Alliance Bernstein.
That said, China’s bigger, higher-rated developers such as Longfor Group Holdings and Country Garden Holdings are holding up much better than their lower-rated rivals.
But most importantly, as noted earlier, China is desperate to limit the fallout on the broader housing market, in a country where real estate accounts for about a quarter of economic output and as much as 75% of household wealth as we have noted for half a decade. China’s housing slump has intensified in recent months after sales plunged and home prices fell for the first time in six years. Further market reaction to Evergrande’s missed payments may be driven by how the restructuring process plays out, said Jim Veneau, head of Asian fixed income at AXA SA.
“An orderly restructuring, where the company can run its operations as normally as possible and refrain from distressed asset sales will substantially help contain further damage across the sector,” Veneau said.
The bottom line, however, was summarized best by China Beige Book: "while direct fallout from the Evergrande bankruptcy - which has been telegraphed for months - won't be the problem, the problem is having a billion Chinese watch this play out, then expecting them to spend afterward."
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-300 billion may not sound like much nowadays, but it's the CDS structured around it that are the big threat. There could be trillions due as a result of this blowup, and more on top of that when they're not paid.
- US firms like BlackRock, Blackstone, Vanguard and Citadel are deep in this fiasco. Why else would they have send a "delegation" over there a couple of months back?
- the first thing that will happen is all non-Chinese bond holders (dollar denominated bonds) will be kicked out of any recovery. So they will then apply for coverage from the insurance companies that sold them protection for default at the rate of about 20-25 cents per one hundred dollars. Since these insurance companies cannot pay out the claim and the insurance companies (remember these are all non-Chinese) may have to declare bankruptcy as well.
Think AIG
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Throughout 2022, we are all going to witness extreme financial stress — and many possible defaults — spreading through various institutions that held Evergrande debt. This can affect pension funds, hedge funds, institutional investors, private investors and even central banks. Every investor who held Evergrande debt is going to get hammered by this default, especially if they were expecting Evergrande’s interest payments in order to meet their own debt obligations. Contagion has begun.
The Tether / Crypto Black Swan scenario
The default of Evergrande is a Black Swan event, and as we have covered the last several days, many analysts believe that Tether, the “stablecoin” provider that creates cryptocurrency out of thin air — digital currency printing — may have tens of billions of dollars of exposure in Evergrande. With default now officially proclaimed, this means Tether’s holdings of Evergrande, Kaisa or other Chinese property developers is effectively worth zero. Importantly, this could mean that Tether no longer has sufficient assets to cover the USDT coins it has issued into the crypto ecosystem.
Logically, if a sufficient number of users seek to redeem their Tether coins and demand dollars, this could spell a run on Tether and theoretically lead to a Tether default. Worsening the context of all this, Tether continues to refuse to submit to any legitimate financial audit, and many observers believe Tether is simply minting USDT coins with nothing to back them. This would be the equivalent of a digital fiat currency counterfeiting operation.
Since two-thirds of all Bitcoin purchases are actually made using Tether coins, it would also mean that Bitcoin’s market valuations may be wildly inflated by digital money printing operations. While Bitcoin itself isn’t at fault here, Bitcoin’s valuations can be heavily manipulated by any other coin that can be traded for Bitcoin.
Tether Holdings started putting out a huge amount of digital coins. There are now 69 billion Tethers in circulation, 48 billion of them issued this year. That means the company supposedly holds a corresponding $69 billion in real money to back the coins—an amount that would make it one of the 50 largest banks in the U.S., if it were a U.S. bank and not an unregulated offshore company.