Buy the dip or bail? Pundits weigh in. In fact, as the possibility of Chinese property behemoth Evergrande defaulting on $305 billion in debt looms, analysts are speculating on how the company’s insolvency may affect the legacy and crypto markets.
Many analysts are hesitant on whether traders should buy the drop or take gains in anticipation of additional bearish momentum, as speculation about whether the real estate investment behemoth will fail has coincided with a slump throughout the crypto and stock markets.
Bitcoin (BTC) is currently down about 13% since the slump began on September 18. While the S&P 500 is down 1.7% and the Hang Seng is down 2.8% in the time window.
Some speculate that Evergande’s probable collapse may be a repeat of Lehman Brothers’ 2008 declaration of bankruptcy on $600 billion in debt, which sparked the Global Financial Crisis.
On the other hand, Bridgewater Associates co-chairman and co-CIO Ray Dalio, addressing at the Greenwich Economic Forum on Sept. 22, downplayed the importance of an Evergrande default, suggesting that the debt is “controllable”.
The Chinese government may intervene
Investors may be irritated. Nonetheless, Dalio believes Evergrande’s debt will not create fundamental harm. Since the Chinese government may intervene to reorganise the business and negotiate deals with it.
Ming Tan, a director at credit rating agency Standard & Poor’s (S&P), believes the Chinese government would step in to help Evergrande reorganise.
Tan told the Financial Times on Sept. 20 that the “profitable elements of Evergrande’s business would likely be taken up by competitors”. Its debt obligations likely to be guaranteed by either a consortium of commercial Chinese banks or the local central bank directly.
Not everyone shares this optimism. Because almost half of the reserves supporting the top stablecoin Tether (USDT) kept in commercial paper. Jim Cramer, the presenter of CNBC’s Mad Money show, believes Evergrande’s financial difficulties will have an influence on the crypto market.
Tether has denied having any Evergrande commercial debt. Notwithstanding, analysts have cautioned that the ramifications of an Evergrande reorganisation might have substantial implications for the commercial paper markets as a whole.
“This debacle has the potential to collapse a lot of Chinese firms. And they have Evergrande exposure, which may mean big trouble,” Cramer said.
Marty Bent, a podcaster and co-founder of Great American Mining, raised red flags in his newsletter on Sept. 20.
Western world exposure to China’s economy
Bent believes that an Evergrande failure will reveal how “exposed the Western world is to China’s economy” through investments in real estate giants, their debt instruments, and Chinese Community Party debt (CCP).
“Evergrande is collapsing, pulling down other major Chinese real estate developers with it. “Another Lehman moment is unfolding throughout the world,” he added.
Furthermore, Bent questioned the government’s likelihood of bailing out Evergrande. Pointing to the Communist Party’s recent drive to reign in Chinese capitalism and enforce real estate rules.
“The CCP has said that they do not intend to bail out real estate developers who are now on the verge of bankruptcy. It would be fascinating to watch if they maintain their posture if the situation worsens,” he added.
The podcaster is unclear how Evergrande’s repercussions would affect Bitcoin in the short to medium term. However, he is “grateful” that he can keep Bitcoin as a hedge against the fiat-backed global financial system.
Evergrande’s stock price has been slowly dropping in 2021 as its credit problems have worsened. After starting the year at over $14, the price has dropped to $2.20, a loss of over 84%.