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In this episode Bitcoin MagazineIn its “Fed Watch” podcast, I discuss the week’s emerging stories, Evergrand and the Chinese recession.
We first brought Evergrand to episode0, August 11, and at the same time I called that China would go into recession in three months. Our position on “Fed Watch” has been bearish on China for more than a year, and my personal position has been deteriorating since the beginning of the 2020 coronavirus crisis.
I started the podcast describing exactly what was happening. Evergrande has massive financial problems, and is likely to default on a default of ০০ 30,000 billion. But it is not alone. To meet its obligations, Evergrand is trying to liquidate its assets, which include land, apartment units, commercial real estate such as its headquarters and much more. All of this liquidation lowers prices, which negatively affects the value of assets of other real estate developers in China. The infection is spreading.
Percentage of household savings in the form of real estate. The average person in China does not invest in the stock market or other financial assets, they invest strictly in real estate, gold and bitcoin. Buying a more affordable home than the first home in China, because you can see that the value of a constantly growing property is very important.
The broader economic environment in China
Evergrand cannot be seen properly without the context of China’s extreme situation. I call it the “Second Communist Revolution” in China behind the hitting of this Evergrand. Marxism is a process that the CCP adopted completely in the late 1970s. First comes capitalism to build capital and wealth, to create the means of production. When income inequality reaches serious levels, workers revolt and seize the means of production from the capitalists. In other words, Marxist communism requires a capitalist stage. China is showing a return to a tougher communist policy. We have seen this shift from Hong Kong to more authoritarianism, but now it has reached technology companies, fintech, IPOs, the education industry and entertainment.
There’s no way CCP hasn’t seen Evergrand come, or it doesn’t know how to bail it out. What the CCP wants is to move away from massive housing projects and redistribution of resources in the industry. This is a very difficult task, which requires breaking the property bubble in China.
Evergrand’s influence in the rest of the world
The rest of the world is not free from the collapse of Chinese credit, but it will affect different economies more or less. The United States should be fairly restrained, while countries that are more dependent on the current international liberal trade system, such as Germany, may be hit even harder. I am drawing parallels to the European debt crisis after the first major financial crisis. At the time, the problem was centered in Europe and the rest of the world. It could be the same, China has a crisis and the rest of the world is slowing down.
We are already in the midst of a period of restructuring the supply chain, on-shoring and trade partners. The Chinese crisis could accelerate the process, which would further alienate China from the world.
Evergrand effect on Bitcoin
Bitcoin has no counterparty risk, and in a deflationary credit crisis, you don’t want to keep assets that are someone else’s liability. Of course, in our now credit-based finance system, this is almost impossible, but Bitcoin provides an elegant and simple solution. Therefore, with Bitcoin the dollar could rise into a liquidity crisis. It is important for Bitcoin not to rely on an investment thesis that relies solely on inflation, because when people realize that we are stuck in a deflationary environment, the reason to buy Bitcoin will go away.
I ended the podcast by discussing the value of Bitcoin and the possibility of Teether being exposed on Chinese commercial paper. This would be terrible for Tether and Altkin, but relatively neutral for Bitcoin, although it would raise some short-term uncertainties.