Evergrande tumbles as default concerns continue to spill over into markets


China Evergrande Group has bank loan payments due today and is expected to make bond repayments on Thursday

Fears of a potential fallout from faltering Chinese real estate giant Evergrande led to declines in a number of sectors on Monday.

Amid growing concern over a default, Evergrande shares fell 11% in the Hong Kong months, down 74% since concerns began to mount over the developer at strong. leverage in the spring.

It has loan repayments on bank loans due today and is expected to make bond repayments on Thursday, with around $ 300 billion in liabilities that appear to be on the verge of default.

Last week the company warned against “enormous pressure” on his cash flow and liquidity, saying that all the media attention made it difficult to sell properties and service his debt, but that he was exploring “all possible solutions” to alleviate his liquidity crisis.

Chinese authorities have reportedly warned major lenders not to expect repayment.

Hong Kong’s Hang Seng Index fell 3.3% on Monday, with the real estate sector among the hardest hit, while a Chinese high-yield bond index rose to 14%, the highest in nearly a decade.

“The Evergrande contagion could spread to other developers and now the entire Chinese credit market is showing a dangerous deterioration in investor confidence and it seems likely that only government intervention can prevent the ball from falling. snow from rolling, ”said Allan von Mehren, chief analyst at Danske Bank. .

“There is no doubt that Beijing is monitoring the situation closely, but it is not known when authorities will step in. To some extent, the developer’s woes were engineered by the government with stricter debt rules implemented. last year and they want to show that unchecked debt comes at a price. But they also don’t want to see a deep financial crisis plunge Chinese housing and the economy into a deep recession. “

The fallout in global markets could come from the US $ 7.4 billion of its US dollar-denominated debt held by foreign investors including Ashmore Group, Allianz and BlackRock.

As the company has a 30-day grace period before an official default is called, so “this story is likely to keep on giving,” Oanda market analyst Jeffrey Halley said.

While some commentators have warned that this could be a “Lehman Brothers” moment for China, echoing one of the first big dominoes to fall during the 2008 global financial crisis, not everyone is at all of this opinion.

“You have all kinds of banks and insurers caught in the net, but at the end of the day I don’t see this as a moment for Lehman right now,” Neil Wilson told Markets.com.

“But combined with the tech crackdown, that’s probably another reason investors will be looking to avoid China in the near term. What we’re seeing today is how risks are assessed gradually and then suddenly. is certainly a major cause for investor concern now and it is possible that we may see further losses before the downside is finally bought in. A market so well conditioned to buy the downside will be hard pressed to resist.

“But the Fed meeting this week will be of particular significance – does a Chinese real estate slump and energy crisis collide with expectations of a Fed rate hike next year and pressures biting inflationists? It would be a pretty nasty cocktail for the risk appetite and I think it’s the risks that are factored into today’s sale (and maybe others). “

Contagion of goods

Commodities, mining stocks and Australian stocks were also sold heavily this morning.

“Any slowdown in China would have important implications for the demand for raw materials given its status as the world’s largest consumer of many minerals and metals. The situation also has uncomfortable echoes of 2015, when fears over Chinese debt caused a large and widespread market correction, ”said Russ Mold, chief investment officer at AJ Bell.

“A combination of inflation and a global slowdown, namely stagflation, is the big fear facing investors and will need to be addressed if the markets are to regain their equilibrium.”

The fall in commodity prices also follows Chinese Premier Li’s statement over the weekend that China will use “market tools” to stabilize commodity prices.

Halley said this likely means China will release more raw materials into domestic markets from its strategic reserves.

“As a price taker, not a price maker, there is little that China can do to influence prices in the medium term,” he said.


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