The Evergrande crisis in China is shaking up markets around the world

HONG KONG / NEW YORK – A wave of fear over Chinese economic growth swept global markets on Monday as China Evergrande, the country’s most indebted real estate developer, was on the brink of default and investors worried about the consequences for its national and international peers. commodity prices.

While the Chinese and Hong Kong real estate groups bore the brunt of the sale, the impact was felt on the European and American stock markets. China Evergrande, with liabilities of nearly a third of a trillion dollars, faces deadlines this week for payments to banks and bondholders.

In the United States, the Dow Jones Industrial Average ended down 614 points, or 1.8% to close its worst trading day since July. Caterpillar and Goldman Sachs were the benchmark’s biggest losers on a day when investors were also watching the outlook for the Federal Reserve’s cuts to monetary easing. The Dow Jones fell 972 points to its lowest before cutting losses towards the end of the session.

The repercussions of the potential collapse of Evergrande will likely contribute to China’s current economic deceleration, which in turn anchors global growth and inflation and casts a veil on commodity prices, ”said Phoenix Kalen, strategist at Societe Generale in London.

The Nasdaq closed down 2.2% and the top three declines were all Chinese companies: Pinduoduo, Baidu and JD.com. The S&P 500 ended down 1.7%. It was the worst trading day for both indices since May.

Security personnel barricade Evergrande’s offices in Shenzhen, China. The authorities are keen to prevent the group’s problems from causing greater economic ripples. © Reuters

The Global X MSCI China Real Estate ETF, an exchange-traded fund focused on the Chinese real estate sector, closed down 5.4% for the day.

In Europe, London’s FTSE 100 slipped nearly 1%, with miners leading the pullback, fearing a Chinese slowdown would further erode commodity prices. The Euro Stoxx 600 index fell by almost 1.7%.

Iron ore prices fell below $ 100 a tonne for the first time in more than a year, as China imposes more restrictions on steel production combined with investor fears that it will ‘a slowdown in real estate construction reduces demand for the metal. Copper fell 2%, as did oil. US steelmaker Nucor posted second-worst S&P performance, closing 7.6%

On Tuesday morning, the Japanese benchmark Nikkei Stock Average followed the trend, falling sharply to around 600 yen, or 2%, from the previous weekend to push it below 30,000 yen. The drop was the biggest since the end of June.

Global economic growth is closely tied to the fortunes of China, which was the only major economy to grow last year. In April, the International Monetary Fund predicted that China would contribute more than a fifth of the increase in global gross domestic product in the five years to 2026.

As the Chinese economy quickly recovered from the pandemic-induced slowdown, signs of slowing growth have emerged, particularly in the housing market where activity fell sharply in July and weakened further. in August.

Evergrande shares fell another 10.2% on Monday in Hong Kong, bringing losses for the year to 84%. The Hang Seng real estate index fell 6.7% to its lowest level since 2016 and the larger Hang Seng index ended down 3.3%. Chinese markets are closed until Wednesday for the holidays, but Singapore-traded FTSE China A50 index futures are down more than 3%

Evergrande has started offering suppliers and private investors apartments, parking lots and commercial space to replace missed payments. He faces a series of bond coupon payments starting on Thursday, and if he does not make the payments within a month, he will be labeled in default.

“Our baseline remains that any default or potential restructuring of Evergrande would be carefully managed by the government with limited spillover effect on the financial and real estate markets,” Goldman Sachs economists led by Hui Shan said. “This would require a clear message from the government soon to build confidence and stop the ripple effect, the absence of which we believe poses a noticeable downside risk to growth in the fourth quarter and next year.”

However, economists have warned that if a default were to occur without a clear “delineation” of spillovers to other parts of the economy, then the results would be harsher, perhaps up to 4.1% of GDP when real estate activity collapses and financial conditions collapse. to squeeze.

S&P Global Ratings also said it did not expect “a material systemic event in the event of Evergrande default.” But in a note to clients, he said the situation could worsen if a disorderly bankruptcy of the group coincided with a deeper market downturn in the sector. “It would set off a vicious cycle. We believe the industry itself has already experienced some weakness in sales and prices since August and may decline further.”

Shares of Sinic Holdings, a Shanghai real estate developer, collapsed 87% before trading ended. Investors fear the company may struggle to refinance a $ 246 million bond it is due to repay on Oct. 18, now that investors have deteriorated in the sector. Fitch Ratings lowered its outlook for the company to negative last week.

Big Hong Kong developers have also felt the negative impact. Sun Hung Kai Properties fell 10%, its biggest drop since 2012, and Henderson Land fell 13%.

China’s largest insurer Ping An fell 8.4%. The company said on Friday that it had no exposure to Evergrande and that its insurance investment fund held equity investments worth 63.1 billion yuan ($ 9.8 billion) related to it. to real estate developers, who she said were largely financially sound.

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