The specter of the 2008 crisis reappears in investors’ minds with what is happening in China with Evergrande. The “too big to fail” phenomenon appears again in the markets.
The prospect of bankruptcy for Evergrande, China’s second-largest real estate company, has all investors waiting for a result. However, the fact that the Asian government has said that it will help if necessary has eased global fears somewhat.
The Evergrande problem originated because the Central Bank of China modified the leverage laws for real estate companies, which had been benefiting from the growth boom and domestic demand of the Asian giant.
Evergrande’s liabilities currently represent approximately 2% of the Asian country’s GDP and amount to $ 305 billion, the same as Turkey’s external debt.
The markets fear that Evergrande is struggling to meet these obligations, and it is feared that it will default and will experience the same thing that happened to Lehman Brothers a few years ago.
Evergrande: Fear of a Global Contagion
Fears about what could happen to Evergrande have been felt more in the Western world than in Asia.
Expert financial traders give a high possibility of an Evergrande default and therefore its bonds are already trading at a 30% discount. Likewise, the shares of other Chinese real estate developers are falling in the face of the fears of large investors. However, the biggest uncertainty is how the Chinese government will act in this situation.
China’s complex real estate world could lead to global financial chaos if not handled intelligently. Financial markets currently have three concerns about what happens to Evergrande:
Firstly, they fear the outflow of many investors from so-called risky assets into safer assets such as the dollar or gold, as they are always the least affected in a major crisis.
Secondly, they are concerned that China’s growth will suffer as a result, because if the construction sector suffers, the associated commodities will suffer as well.
Thirdly, if the world’s second-largest economy is delayed in its recovery from the pandemic, global growth expectations will be reduced and financial markets will take another hit.
On the other hand, the Chinese real estate giant Evergrande suspended its operations on the Hong Kong stock exchange.
The group agreed to sell its 1.7 billion shares, headquartered in the northeastern province of Liaoning, to the local authorities-owned Shenyang Shengjing Finance Investment Group, Evergrande said in a statement on the Hong Kong Stock Exchange.
Markets React to the News
The major averages took steep losses to start the week as investors continued their rotation out of technology stocks amid rising bond yields.
The Dow Jones Industrial Average fell 323.54 points to 34,002.92, despite large gains in Merck. The S&P 500 shed 1.3% to 4,300.46. The technology-focused Nasdaq Composite was the relative underperformer, dipping 2.1% to 14,255.48.
The 10-year U.S. Treasury yield hit 1.56% last week, its highest point since June, with investors concerned about inflationary pressures and tighter monetary policy.
Social media giant Facebook lost 4.9% after being accused of a “betrayal of democracy” by a whistleblower who revealed her identity on Sunday
The fourth quarter is typically a good period for stocks, but overhangs like central bank tightening, the debt ceiling, Chinese developer Evergrande, and Covid-19 could keep investors cautious. Heading into the fourth quarter, more than half of all S&P stocks are off at least 10%.
The S&P 500 has averaged gains of 3.9% in the fourth quarter and was up four out of every five years since World War II, according to CFRA.
One of the first hurdles markets face in the new quarter is Friday’s closely watched employment report, which could spur the Federal Reserve’s decision on when to taper its bond-buying program.