China’s second-largest property developer may end up defaulting, a prospect that is sending shock waves across global markets.
Evergrande is $300 billion in debt and warned investors it may collapse if it can’t raise capital quickly. Shares of Evergrande’s stock plummeted on Monday by about 10% after falling roughly 80% over the past six months.
There are concerns that a collapse of Evergrande, which holds 6.5% of China’s total property sector debt, could spell economic catastrophe similar to when U.S. investing giant Lehman Brothers declared bankruptcy in 2008.
While Evergrande was supposed to repay interest payments on some loans on Monday, officials in China have reportedly told the major banks they won’t be paid. A collapse could ricochet across the Chinese economy given how many firms Evergrande is tied to.
Evergrande owes money to more than 170 Chinese banks and 121 other financial firms, and the financial fallout from Evergrande defaulting would be “far-reaching,” Mattie Bekink of the Economist Intelligence Unit told the BBC.
Should the firm collapse, banks may be forced to lend less, which may result in a credit crunch.
“The repercussions from Evergrande’s prospective collapse will likely contribute to China's ongoing economic deceleration, which in turn anchors global growth and inflation and casts a pall over commodity prices,” said Phoenix Kalen, a strategist at Societe Generale in London.
Given Evergrande’s enormous size, Goldman Sachs economists predict that any default or restructuring of Evergrande “would be carefully managed” by Beijing. They contend the Chinese government would need to send a clear message “to shore up confidence and to stop the spillover effect.”
While some economists have raised the Lehman-like potential of an Evergrande collapse, others believe the threat to the global economy to be less. Simon MacAdam, the senior global economist at Capital Economics, thinks the danger is being overblown.
“On its own, a managed default or even messy collapse of Evergrande would have little global impact beyond some market turbulence,” said MacAdam, according to CNBC. “Even if it were the first of many property developers to go bust in China, we suspect it would take a policy misstep for this to cause a sharp slowdown in its economy.”
Still, investor sentiment was rattled on Monday. The Chicago Board Options Exchange Volatility Index, better known as the VIX, is intended to gauge fear in the markets. It was up more than 20% amid the Evergrande fiasco while the Dow dropped to a session low of more than 900 points.
The Dow closed down 614 points, or 1.8%, after clawing back some of its losses earlier in the day. The S&P 500 dropped 1.7% and the Nasdaq shed 2.2%.
Another factor affecting the stock market is this week’s meeting of top U.S. Federal Reserve officials. The central bank, led by Chairman Jerome Powell, is expected to hint at tapering its asset-purchasing program after its two-day meeting concludes on Wednesday. The Fed could also announce plans to slash bond buying at its next meeting in November.
Markets are also reacting to unease surrounding the widely spreading delta variant of COVID-19 and uncertainty about the looming deadline for Congress to raise the debt ceiling. September is also just a historically bad month for the markets.
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Original Author: Zachary Halaschak