For those who have had a negative view of China's economy for decades, the Evergrande fiasco was a dream come true. The company, however, has come to an agreement with lenders to avoid default. What one will have to see is whether Evergrande can fulfill most of its upcoming obligations with respect to its $300 billion debt pile.
In case one is not aware, this week the financial markets were spooked by a looming default by Evergrade - a large property developer in China that employs 20,000 people. Markets completely turned to risk-off mode and S&P500 fell 1.7% on Monday and falling again on Tuesday. DXY strengthened and US 10 year treasuries also rose, along with gold. Bitcoin fell 20%!
While Evergrande managed to close a deal with lenders to pay off the upcoming interest liability, the overall mood in China is to control leverage in the housing market. The government has in the past fueled its GDP by rapid growth in lending, and the housing industry contributes 28% to its GDP. Now, it wants to focus on "common prosperity" and tighten the housing market. Land sales, as well as property sales in China, have fallen as a result. However, it is not easy to change course without side effects and Evergrande was just a trailer.
Things seem to be calm today with the financial market willing to initiate longs in risk assets. Bitcoin is up as well but will this last? If the Chinese government is serious about tightening lending standards, then the pain will spread to other developers and from thereon to property buyers. However, the government cannot allow the pain to reach investors. This uncertainty however does pose a risk to Bitcoin reaching $100k this year. With any lingering market correction, driven by actions in China and slowing global growth, Bitcoin will suffer too. It may seem a stretch but a global risk-off implies stronger correction in crypto markets. For now, hope that the financial turmoil does not spread.