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All times in this update are in US Central time (UTC-6 clock).
Song of the Week - Eastside - Ellie (Don’t x Loyal)
I have a soft spot for women doing Acoustic Covers of rap and pop songs. (Yes, I know who Niykee Heaton is).
Table of Contents
Chinese Bond Crisis
FOMC Meeting
Where We Are In the Macro Cycle
Crypto Macro
Price Action
BitFlow hits Public Mainnet
StackingDAO NFTs
Degen Activities
Conclusion
Internal References
1. Chinese Bond Crisis
The Chinese bond markets are continuing to implode, we’ve previously discussed this issue here, here, and in several other posts, you can get a refresher on it in those two links.
Today, the largest corporate real estate bond issuer in China was just ordered to liquidate by a bankruptcy court after they failed to restructure their debt. Yes, that’s right… Evergrande has taken its dirt nap.
Chinese regulators have said the risks of global shockwaves from Evergrande’s failure can be contained.
According to public information, Evergrande owes over $300 billion in bonded debt but only has $240 billion in actual assets. But a lot of their constructions are unfinished or of such shoddy workmanship that they may not be able to be sold at all. The actual value of Evergrande’s assets may be far lower than the $240 billion that is currently being estimated. But even if they actually can liquidate everything for $240 billion, that is still a $60 billion shortfall for all creditors involved and it’s quite likely that many creditors will receive $0.
The main issue with Chinese shadow banking is that it makes it nearly impossible to track how many times the Evergrande debt has been rehypothecated throughout the economy. How many times have those bonds been posted as collateral for something else? How many times have properties supposedly built by Evergrande been posted as collateral for cash-out refinancing that is currently unpaid?
You may recall from this piece I wrote in February of 2022, that Chinese real estate bonds were trading at 10 cents on the dollar.
The truth however, is that the debt is fractal. At each level of lending and borrowing officials were likely acting under the table. In truth, I suspect the shadow debt within China is likely several times larger than reserves. As these major real estate companies collapse, we are finding that their corporate bonds are actually trading at 10 cents on the dollar, implying a 9:1 debt:reserve ratio.
The markets were valuing Chinese real estate debt at 10 cents on the dollar. Meaning they presumed that for every $1 of stated asset value, there was just $0.10 of recoverable asset value.
Regional and country-level government officials in China have already seized EverGrande assets, but very few statements have been made about the quality these constructions are in. They are primarily in trouble because people lent them money for Evergrande to build them properties and then Evergrande either didn’t build anything at all and funneled the money to themselves, or they built shoddy constructions and cut corners with the assumption that they would get away with it.
The buildings in the video above are not from Evergrande, but they are an unfortunately common story in China. They stood empty from 2013 to 2022. The first developer ran out of money. A second developer bought the buildings assuming they could finish them, and then discovered significant faults in the foundation construction to the point where they could not even safely finish construction. So they sold the project for pennies and got a Chinese demolition company to blow them up. Except that failed because they cut corners with one building failing to blow up and several falling onto their sides and throwing debris into the street and neighboring constructions.
China in a nutshell.
Most of EverGrande’s seized property looks just like the one above. How much money is that worth? Is it worth anything at all? Or is it a liability in and of itself? If construction can’t be completed, then this building actually will cost money to get rid of. You can’t liquidate something like this, especially if there are major faults in the construction like the buildings in the video above.
There might legitimately be maybe $50 billion in recoverable value in the Evergrande assets that were seized. This kind of collapse will rock the Chinese economy if it’s allowed to happen, and there are supposedly ~$28 billion owed to Western banks in this fiasco. While small compared to the total sum, this is still massive. We will likely be watching this sector continue to impact the West for most of the year with several entities having to patch holes in their balance sheets for bonds that are essentially not worth the paper they are printed on.
As the liquidation efforts are ongoing, what might Beijing do here? Do they lie? Do they print money and pretend a liquidation occurred to save face? Do they let creditors take it on the chin? Who knows? I don’t, but whatever does happen here will be felt across all markets.
The ghost cities China has spent the last 2 decades building will leave a scar across China that might take decades to remove. Degeneracy pays off in crypto, it doesn’t pay off in real estate.
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