Evergrande’s Saga is A wake up call for investors to consider decentralized markets
Evergrande, the Chinese real estate group, has been causing shock waves in the global financial markets after it announced a possible default in its upcoming bond payments.
The firm is currently struggling with over $300 billion in debt and missed a crucial interest payment to international bondholders on Sept 23 and Sept 29, totalling $131 million.
This developing saga has kept global financial market stakeholders in a state of uncertainty, with the big question being whether the Chinese government will bail out Evergrande. As it stands, it is not clear which path the Chinese government or Evergrande will take. The company’s shares are currently suspended from trading on the Hong Kong Stock Exchange.
On the missed dollar interest payments, Evergrande’s lack of communication is offering little to no reprieve for the international bond investors. According to a report by the Financial Times, Evergrande’s international bondholders have since hired Kirkland & Ellis law firm and Moelis investment bank to advise further on the situation.
With only a 30-day grace period before declaring an official default, Evergrande only has a few days left to make the interest payments to its international bondholders. Nonetheless, things are not looking bright for Evergrande and the company’s stakeholders. Bert Grisel, a managing director at Moelis, told the international bond investors on a call that a default is likely imminent,
“We all feel that an imminent default on the offshore bonds will occur in a short period of time.”
A Case of History Repeating Itself?
Could this be a case of history repeating itself? A housing bubble caused the 2008 financial crisis in the U.S after banks created financial products dubbed subprime mortgages. These financial instruments were sold with A-ratings from popular agencies such as Moody’s, while in truth, they were way less than the depicted market value. Eventually, the market self-corrected, leaving many homeowners with huge debts and banks on the brink of collapse.
Evergrande’s woes are almost similar, given that a considerable chunk of the company’s assets is invested in real estate. The firm owns over 1,300 real estate projects across 280 cities in China. In addition, Evergrande’s services management arm oversees about 2,800 projects distributed in over 310 China-based cities. Going by these statistics, it is clear why some analysts predict that the worst-case scenario could lead to a bigger impact on the global economy.
But, what exactly is the problem? The rain started beating Evergrande when Chinese authorities moved to curb excessive borrowing by players in the real estate market. In the past few months, this pressure has been mounting, leaving Chinese real estate developers with deep liquidity issues and minimal financing options.
One can only help but notice that centralized financial investment vehicles have time and again failed investors. It is not surprising that emerging technologies such as blockchain are challenging the long-standing centralized architecture of financial markets by introducing decentralized ecosystems. This growing trend has given rise to innovations like Decentralized Finance (DeFi) and Non-fungible tokens (NFTs), seeking to link investors directly with market opportunities instead of going through a financial intermediary.
The Value Proposition of Decentralized Markets
The 2008 financial crisis and Evergrande’s situation can be linked to a central point of failure, the third party financial investment vehicles. So, how do decentralized technologies solve this shortcoming?
Bitcoin’s debut gave rise to other complex ecosystems which feature decentralized financial services, including lending & borrowing, derivative instruments and staking (locking one’s tokens to contribute towards securing a specific blockchain network). Though most DeFi innovations are still in the early stages, some projects have already launched full-suite platforms to serve the growing needs of global investors.
Today, one is not limited to investing their money with banks or real estate groups like Evergrande. DeFi platforms such as Qtum have emerged, offering prospective investors an opportunity to stake Qtum tokens and earn a yield of up to 16% annually. Moreover, Qtum’s DeFi staking platform allows investors to delegate their coins to ‘super stakers’ who in turn do the heavy lifting; at the same time, investors are rewarded for contributing to the Qtum network.
Notably, the yield offered on DeFi ecosystems as Qtum varies depending on the underlying tokenomics. Qtum leverages an inflationary model, adding about 1 million coins into the circulating supply yearly. The project also features a halvening, with the current yield set to reduce by half around December 2021. Going by the history of Bitcoin’s halvenings, such events have often led to a price increase of the underlying token.
Qtum is one of the many DeFi platforms where global investors can stash their wealth instead of local banks or real estate firms. The returns are also significantly higher than the rates offered by local banks. On average, a U.S bank savings account can yield between 0.03% and 0.06% APY, a drop in the ocean compared to what is offered in the DeFi ecosystem. Above all, DeFi eliminates ‘rogue’ third parties, replacing them with transparent and verifiable pre-coded smart contracts.
The Evergrande saga has revived old wounds, especially for Chinese homeowners who are currently in massive debt. Smaller real estate firms are also feeling the pinch, with notable players such as Fantasia also defaulting on a recent bond payment. This ripple effect will likely continue to affect the Chinese economy, although it remains uncertain whether or when the bubble will burst.
Hong Kong-based independent analyst Travis Lundy told the Washington Post that a lot is at stake,
“How do you prick a bubble that every single person, from homeowners to local governments, doesn’t want pricked? Nobody really wants to see this unwind. If this does, there is going to be a lot of pain,”
At least all hope is not lost; decentralized ecosystems built on blockchain will provide long-term solutions to challenges caused by a centralized financial ecosystem. The past few years have seen more people from China join the crypto industry despite a tough stance by authorities against digital assets. It is only a matter of time before stakes shift in favour of decentralized markets.