Evergrande Crisis Explained – Stocks & Crypto Correction
So weve seen that the ftse 100 is down after open weve seen the hong kong hong kong index was down and we can see the futures in the united states smp dao and nasdaq are all down over one percent. Now this is all around fears of contingent forever grant. Now, for those who arent familiar, evergrant is the second largest house builder in china and theyre about to default on about 300 billion yep thats billion dollars of payments. They are due – and this is the most significant test that chinas financial system has ever faced and its got the wider investment community and world worried about the fear of contagion. In fact, some are even calling this chinas own lehman brothers uh problem now this has got people debating about whether china are going to bail out evergrant. Some are saying yes, some are saying no, but we need to go back and look at the context. A little bit more so we know um ji ping is looking to bring down the debt ridden culture in china. So, to put this into context, china has a debt problem right now, in 2007, 2008 china had to fuel 6.5 trillion of debt to raise gdp by 5 trillion. You want 6.5 trillion led to 5 trillion in uh gdp growth. Now, in 2015 and 2016 they had to spend 20 trillion, okay, so more than 3x 20 trillion to get the same 5 trillion uptick in uh their gdp.
So you can see they are getting a diminishing return on the debt, so they need to figure out a more sustainable way of growing their gdp. Now, naturally, this has got analysts saying: look china cant. Have it both ways? They set really high gdp growth expectations. Then they wonder why they need to then leverage up so heavily in order to meet them. They should set a more realistic gdp growth forecast based on the underlying growth of the economy, which makes complete sense now coming back to everground. They are due to default on two key bank repayments tomorrow, and that is what that is one of the reasons why the market is super jittery right now. You remember with the lehman brothers uh case uh many years ago we saw that we were led to believe that the government thought that the government would consider them too big to fail, but at the last minute they let them fail, and could that be the case Here, could this be an example of ji ping using evergrande as um a precedent? Could he say, look if you guys continue like this im, not gon na save you now, on the other hand, if he does go in and save them, he set a precedent and therefore maybe this wont change any behavior, maybe the other large property and house builders And other companies will continue to raise uh loads of debt and be highly leveraged, because theyve proven now that they bailed out every grant so were in a bit of a tricky political issue.
Here some have uh have indicated that they believe they will keep evergrant uh alive to some extent in some sort of uh a very um skeleton way, and they believe that theyll do that, even if its just to finish off the 1.4 million homes that theyve already Pre sold so youve got to remember with g ping. He does not want thousands of angry protesters and weve already seen protesters uh coming out and protesting at this situation. He does not want them protesting and demanding their money back. That is not a good look for his uh for his reign right, so hes going to want to, at the very least, ignore his suppliers, but folk ignore the creditors, but at least focus on getting these houses built. Now, like i said that will mean that suppliers are going to be next on the pecking order, right, theyre, very unlikely to then see much returns. However, evergrand have also said that theyre willing to pay off some of the debt in houses. So theyre saying why dont you just take some of our assets, these half built homes, or even some of these complete build homes which weve not managed to sell um and were not sure whether the suppliers have agreed or not, but the problem with doing that is, If you start offload lets say you owe someone 100 lets, call it uh 100 billion of debt, and you you give them houses assets worth 200 billion right.
So, even if they were to accept that once youve accepted it and all this contagion happens, maybe that 200 billion worth of houses might fall to 100 billion, see what i mean. So there can be a lot of confusion around this um and its not an ideal solution and thats. What some people are most scared of the worst case scenario here is for a fire sale like that of uh ever grants asset if they put a file sale of all the housing that they own thats, really gon na undermine the market and start creating a domino Effect of pushing prices down and therefore the whole economy and even the global economy right so we know any downturn in china will have a significant impact on commodities as they considered. You know they have the status as the largest consumer of commodities, minerals and metals um, and we also know that in 2015, when china had their debt, uh concerns around there and that led to a really broad based correction and, i think, thats. What we may see here i mean coming into this month. We already bit jittery here uh in the western world around seeing a bit of a correction. We saw a couple of ticks down and were asking ourselves. When are we gon na see the next five percent smp correction? We know jerome powell is speaking 22nd 21st 22nd, which is uh tuesday and wednesday, so thats his fomc meeting, and we know that you know theres going to be a conversation around taper um hes had his jobs figured hes had his cpi figure hes seen it kind Of inflict down will he take the decision to start a taper, and a lot of people are thinking that may not? We may not be in for a september.
Announcement were not going to see an announcement tomorrow for september, but maybe a november december. One others are saying early next year: um now the fomc are not the only ones. A lot of the other european central banks are also having these conversations right now, and you can see that the trend is that the majority of central banks are now moving towards language and rhetoric around tightening their monetary policy, so that, with this backdrop of evergrant and The debt contagion that this can cause definitely has us prepared for a bit of a correction. So brings us to the question: what should we do, and my advice in this situation is not financial advice – is to have some cash ready. You really need to have cash ready for these kind of instances. So if you, you know my tactic in these kind of instances, i dont like to keep loads of cash around but ill park it in amazon or apple or some of these bit of google safe place, and when i need it, when i see a significant dip In the market and crypto, by the way, because i i do believe this contingent is going to head over to crypto, you can already see uh bitcoin has tumbled down to 44 uh thousand dollars, which has im pretty sure, has uh uh something to do with the Evergrand crisis and the wider contagion fears, but you want to have some cash ready to buy these dips.
I think youre going to get some good dips here, theres a lot of backdrop of uncertainty and you can almost feel that were going to get some cheaper prices coming in and again, if you have those high conviction plays which you believe in no matter what these Kind of things arent going to affect certain high conviction plays its a good opportunity to get into some of your favorites or top up your positions. When the market takes a bit of a panic – and i think you know, whenever you have these kind of issues – weve saw it with lehman brothers, we saw it with a few others. They can either become very big events, in which case we need to face that anyway, or they can really quickly be a lot of fear. A lot of christian crescendo fear coming into an almost a bit of an anti climax right, because tomorrow uh the chinese communist party could decide. The ccp could decide tomorrow, um that were gon na bail them out its, not its a non issue now and the market can return back to normal. So we need to be a bit vigilant. We need to be prepared, its always good to have cash or cash. Like assets ready to buy the dip, if we get a significant correction – and i think other than that, we should just watch carefully get our positions ready. Keep an eye on your favorites and mark a few price points that youre willing to ladder in at based on your conviction and then just watch.
I i mean you know not good news for crypto. We can see that falling uh stock markets, not looking too positive, and i think this is um. You know its just a lot going on. At the moment we had the weaker jobs figure we saw, inflation is still high, but kind of inflecting down. We know the fmc fomcs meeting tomorrow and then this evergrant issue on top, has everybody with a jitters. So there you have it guys.