Australian investors suffered a brutal day after the stock market fell to a new eight-month low and the price of iron ore fell.
$ 50 billion was wiped from the Australian stock market on Monday as the price of iron ore plummeted, while global markets were frightened by fears that one of China’s biggest real estate developers might go bankrupt.
The price of iron ore fell to US $ 90 per tonne, down 60% from its May record.
The price fell 4.9% to US $ 101.30 over the weekend, according to the ANZ Morning Research Report.
The price is now well below its peak, set only four months ago.
The drop has huge implications for Australia’s finances.
According to the 2021-2022 federal budget, for every US $ 10, the price of iron ore falls, nominal GDP falls by $ 6.5 billion and budget coffers are emptied by $ 1.3 billion.
However, increased demand for Australian coking coal helped to mitigate the blow somewhat.
Overall, the ASX 200 is down 150 points or around 2% today, the worst day since February 26.
It comes as one of China’s biggest real estate developers, the China Evergrande Group – a voracious user of iron ore – is on the verge of default on hundreds of billions of dollars in debt. Falling iron ore prices have also been blamed on China’s decision to cut steel production in a bid to slow pollution.
The price of iron ore has matched the fortune of Evergrande, which an expert described as recently being in a “death spiral.”
A drop in Chinese demand could have a double impact on the Australian economy.
First, it would probably lower the prices. Evergrande is the world’s largest importer of iron ore.
There are also concerns that Chinese investors who own Australian real estate could liquidate their assets to cover their losses.
The prospects for the real estate developer to overcome the current liquidity crisis are dire, Chinese state media reported.
It owes $ 300 billion to its creditors and has contracts to build up to 1.6 million apartments, according to the New York Times.
Its shares have plunged more than 80% this year.
Concerned investors protested outside the company’s headquarters last week, demanding responses from the company.
Police officers with riot shields have been deployed to maintain order, according to AFP journalists at the scene.
Evergrande was downgraded by two credit rating agencies last week as its shares fell below their 2009 listing price, with an avalanche of headlines and speculation about its impending collapse on Chinese social media.
On Monday, the company insisted it would avoid bankruptcy.
But on Tuesday, he released another statement to the Hong Kong Stock Exchange, saying he had hired financial advisers to explore “all possible solutions” to alleviate his liquidity shortage.
It is not known whether the Chinese government will bail out the company.