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debt crisis, bond default and investor risks

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The Emerald Bay residential project developed by China Evergrande in the Tuen Mun district of the New Territories in Hong Kong, China, on Friday, July 23, 2021.

Lam Yik | Bloomberg | Getty Images

Chinese property giant Evergrande is on the brink of collapse, and analysts warn the potential fallout could have far-reaching implications that spill outside China’s borders.

“Evergrande’s collapse would be the biggest test that China’s financial system has faced in years,” says Mark Williams, chief Asia economist at Capital Economics.

Here’s how bad its problems are, and what’s in store for investors.

How did we get here?

Evergrande’s collapse would be the biggest test that China’s financial system has faced in years.

Mark Williams

Capital Economics, chief Asia economist

Banks have also responded to its deteriorating cash flow. Some in Hong Kong, including HSBC and Standard Chartered, have declined to extend new loans to buyers of two uncompleted Evergrande residential projects, said Reuters.

Ratings agencies have repeatedly downgraded the firm, citing its liquidity problems. Evergrande’s problems intensified last year when China introduced rules to rein in the borrowing costs of developers. Those measures place a cap on debt in relation to a firm’s cash flows, assets and capital levels.

Its share price plunged nearly 80% so far this year, and trading of its bonds was repeatedly halted by Chinese stock exchanges in the past weeks.

What does Evergrande do?

Evergrande is everywhere. Its main business is in real estate, and it’s China’s second-largest property developer by sales.

  • Evergrande owns more than 1,300 real estate projects in over 280 cities in China.
  • Its property services management arm is involved in nearly 2,800 projects across more than 310 cities in China.
  • The company has seven units dabbling in a wide range of industries, including electric vehicles, health-care services, consumer products, video and television production units and even a theme park.
  • The firm says it has 200,000 employees, but indirectly creates more than 3.8 million jobs every year, according to its website.
  • Evergrande’s shares and bonds are included in indexes across Asia.

Who will be affected?

The pool of affected parties include banks, suppliers, home-buyers and investors.

Evergrande warned this week its escalating troubles could lead to broader default risks.

It said that if it can’t repay its debt, it may lead to a situation of “cross default” — where a default triggered in one situation may spread to other obligations, leading to broader contagion.

A banking failure triggered by the collapse of major property developers was the single most likely scenario that could lead to a hard landing in China.

Mark Williams

Capital Economics, chief Asia economist

Read more about China from CNBC Pro

In fact, sentiment is already spreading to Asia high yield bonds. Yields on Asian offshore bonds, dominated by property firms, have spiked to an average of 13%, according to TS Lombard.

That also means offshore investors are at the losing end, the research firm said in a note last week.

“The company’s guarantee to deliver all pre-sold projects is likely to lead to overseas stakeholders seeing little, if anything, from the ultimate sale of a developer’s assets in the event of a bailout,” said TS Lombard.

“Hence the prospect of an unequal swap, where the interests of on-shore lenders – households and banks – are protected at the expense of equity and off-shore bondholders,” the note said.

3. Suppliers

The implications of Evergrande’s failure could also reverberate through to other industries if suppliers are not paid. According to S&P Global Ratings, Evergrande might be “trying to persuade” its suppliers and contractors to accept physical properties as payment — in a bid to preserve cash for loan repayments.

I believe there will be some supporting measures from the central government, or even the central bank, trying to bail out Evergrande.

Dan Wang

economist, Hang Seng Bank

In an August report, S&P estimated that over the next 12 months, Evergrande will have over 240 billion yuan ($37.16 billion) of bills and trade payables from contractors to settle — around 100 billion yuan of that amount is due this year. 

A paint supplier to Evergrande, Shanghai-listed Skshu Paint, said in a filing that the real estate firm repaid part of its debt in properties – and uncompleted ones at that.

Ratings agency Fitch said banks may also have indirect exposure to Evergrande’s suppliers — the developer’s trade payables stood at 667 billion Chinese yuan, according to Fitch analysis.

Is Evergrande too big to fail?

The government is likely to step in due to how important Evergrande is, according to analysts.

“Evergrande is such an important real estate developer, and it would be a strong signal if anything happened to it,” said Dan Wang, an economist at Hang Seng Bank. “I believe there will be some supporting measures from the central government, or even the central bank, trying to bail out Evergrande.”

But a restructuring could be more likely, according to other analysts.

“The most likely endgame is now a managed restructuring in which other developers take over Evergrande’s uncompleted projects in exchange for a share of its land bank,” Williams of Capital Economics said in a note last week.

It’s likely that the government will prioritize homebuyers and banks over other parties, he said.

“Policymakers’ main priority would be the households that have handed over deposits for properties that haven’t yet been finished. The company’s other creditors would suffer,” Williams wrote.

Investment bank Natixis said the Chinese government will avoid “systemic risks” in the lead-up to the 2022 National Congress of the Chinese Communist Party, given its historical importance.

“However, this would also imply China Evergrande’s debt crisis may snowball down the road,” the bank said in a note, adding that economic growth will not mitigate financial losses as was the case in the past.

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Elon Musk reposted 28-year-old’s meme, it sold as an NFT for $20,000

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It’s no secret that billionaire Elon Musk loves memes. He frequently reposts them on Twitter, where he has 61 million followers.

Though some dislike his reposting, as he often neglects to give the original meme creators credit, others have profited from Musk’s practice, including self-proclaimed “hobby artist” Eva Beylin.

Beylin was thrilled when Musk reposted her meme on Wednesday. “The ultimate prize of memeology is for the ultimate meme lord to use your meme,” Beylin, 28, tells CNBC Make It.

Even though Musk didn’t give her any attribution, “I am over the moon,” she says, adding that she’s a big fan of Musk.

Beylin’s meme, which she named “Love in The Time of Web3,” depicts a cartoon couple admiring the prices of bitcoin and ether, which are $69,000 and $4,200, respectively, in the meme. While the price of bitcoin hasn’t hit $69,000, the numbers are an obvious nod to meme culture.

As the director of The Graph Foundation, which supports blockchain data protocol The Graph, Beylin is passionate about Web3, which is the decentralized iteration of the internet that powers blockchain-based applications like NFTs.

“Love in The Time of Web3” got a lot of attention following Musk’s tweet. That night, Beylin listed it as an NFT, or nonfungible token, on marketplace Zora, and two days later, it sold for five wrapped ether, which is about $19,800 at current pricing, to an anonymous buyer.

“It is surreal,” Beylin says.

Though it was Beylin’s idea to create the meme, she did not design the image of the cartoon couple or edit the prices of bitcoin and ether.

Beylin was inspired to create the meme after seeing a post by another Twitter user who edited the cryptocurrency prices and tweeted it as a joke.

To compensate the user, who is known as @shegenerates, Beylin gave her 20% of the proceeds from the NFT sale. Shegenerates was fine with Beylin using her edit, she tells CNBC Make It.

“Personally, I have [Musk] blocked on Twitter, so I only saw it after Eva [Beylin] posted about him sharing it. I wish I got all those likes myself because I can only imagine how much serotonin my brain would make with all that attention, but memes are permissionless, so it’s just cool to see things I shared around,” Shegenerates says.

Beylin doesn’t know the creator of the image depicting the cartoon couple. And because of the legal gray area that NFTs exist in, it’s not clear whether the use of this image infringes on any potential copyright laws.

With her cut of the sale, Beylin plans to reinvest in other artists by buying their NFTs.

“As a hobby artist, I’d never be able to reinvest in art or have my art paid for [without NFTs]. So, my thing has always been reinvesting back into NFTs,” she says.

The buyer of “Love in The Time of Web3” has already relisted the meme for 69.42 wrapped ether, or about $275,000. Though it’s less than the buyer’s asking price, a bidder already offered 6.94 wrapped ether, or about $27,500, for the meme.

If it resells, Beylin will earn a 15% royalty, she says.

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Don’t miss: This 12-year-old coder helped develop an NFT collection that made over $5 million in 3 weeks



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Xpeng launches flying car that can also operate on roads

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HT Aero, an affiliate of Chinese electric carmaker Xpeng Inc., launched a new vehicle capable of flying in the air and driving on roads. The launch of HT Aero’s 6th–generation model happened at the Xpeng Tech Day on Sunday, October 24, 2021.

Xpeng

GUANGZHOU, China — HT Aero, an affiliate of Chinese electric vehicle maker Xpeng Inc., launched a new flying car on Sunday that it says can also drive on roads.

The company says it plans for a rollout in 2024.

HT Aero’s vehicle will have a lightweight design and a rotor that folds away, the company said. That will allow the car to drive on roads and then fly once the rotors are expanded.

The vehicle will have a number of safety features including parachutes, the company said.

HT Aero is backed by Xpeng and its founder He Xiaopeng. The company raised $500 million last week from a number of outside investors including high-profile venture capital firms.

Flying cars — also called electric vertical take-off and landing vehicles — have garnered a lot of interest from automakers and start-ups.

However, there are a number of challenges for these vehicles to become wide-scale including regulation and safety issues.

HT Aero’s new land and air vehicle was launched at Xpeng’s Tech Day where the company also took the wraps of the latest version of its advanced driver assistance system called XPILOT 4.0.

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Twitter and Square CEO Jack Dorsey says ‘hyperinflation’ will happen soon in the U.S. and the world

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Jack Dorsey, CEO of Twitter and co-founder & CEO of Square, speaks during the crypto-currency conference Bitcoin 2021 Convention at the Mana Convention Center in Miami, Florida, on June 4, 2021.

Marco Bello | AFP | Getty Images

Twitter co-founder Jack Dorsey weighed in on escalating inflation in the U.S., saying things are going to get considerably worse.

“Hyperinflation is going to change everything,” Dorsey tweeted Friday night. “It’s happening.”

The tweet comes with consumer price inflation running near a 30-year high in the U.S. and growing concern that the problem could be worse that policymakers have anticipated.

On Friday, Federal Reserve Chairman Jerome Powell acknowledged that inflation pressures “are likely to last longer than previously expected,” noting that they could run “well into next year.” The central bank leader added that he expects the Fed soon to begin pulling back on the extraordinary measures it has provided to help the economy that critics say have stoked the inflation run.

In addition to overseeing a social media platform that has 206 million active daily users, Dorsey is a strong bitcoin advocate. He has said that Square, the debit and credit card processing platform that Dorsey co-founded, is looking at getting into mining the cryptocurrency. Square also owns some bitcoin and facilitates trading in it.

Responding to user comments, Dorsey added Friday that he sees the inflation problem escalating around the globe. “It will happen in the US soon, and so the world,” he tweeted. Dorsey is currently both the CEO of Twitter and Square.

It’s one thing to call for faster inflation, but it may be surprising to some that Dorsey used the word hyperinflation, a condition of rapidly rising prices that can ruin currencies and bring down whole economies.

Billionaire investor Paul Tudor Jones and others have called for a period of rising inflation. Jones told CNBC earlier in the week that he owns some bitcoin and sees it as a good inflation hedge.

“Clearly, there’s a place for crypto. Clearly, it’s winning the race against gold at the moment,” Jones said Wednesday.

But most of the major investors have not gone so far as to call for hyperinflation like Dorsey.

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