Why the Evergrande crisis is shaking global markets

Fears on beleaguered real estate developer Evergrande Group [3333.HK] the default in stock prices spooked global markets early last week on September 20. The situation has been compared to the Lehman Brothers crisis.

Evergrande share price fell to its 52-week low of HK $ 2.06 on September 20, 89.9% below its 52-week high of HK $ 20.3 set on October 9. 2020. The Evergrande share price is down 83% since the start of the year.

Following a deal with Chinese bondholders late September 22, Evergrande’s share price climbed over 17.6% the next day to HK $ 2.67 at close, recovering most of his losses at the start of the week. Since September 22, the stock has climbed 3.5% in the past five days and is also up 14.6% from its 52-week low.

The MSCI China Real Estate ETF [CHIR] – Evergrande represents 0.69% of its assets – saw similar price movements, falling to a 52-week low on September 20 before recovering on September 23. The fund has registered a loss of 19.72% year-to-date.

In addition, on September 23, the second shareholder of Evergrande, Chinese Estates [0127.HK] has indicated that it could sell its stake, raising its share price by more than 5.5%.

What could be the wider impact of an Evergrande collapse?

If Evergrande were to default, it would be a significant headwind for the real estate industry. And that could have a ripple effect on companies that import into China. The Australian Strategic Policy Institute has warned that demand for Australian iron ore could weaken – its research has argued that the product could be used as a political pawn.

While any collapse could also be a short-term drag for other sectors and exchanges outside of China and Hong Kong, their reaction will depend on other factors, including the US Federal Reserve’s interest rate hike. and reducing bond purchases.

Is a liquidation more likely than a restructuring?

In what is a rapidly changing and ever-changing situation, Evergrande agreed to settle interest payments for an estimated CNY 232 million on domestic bonds on September 22.

There was also an $ 83.5 million coupon due on September 23 with a 30-day grace period, but at the time of writing no payment had been made.

After the Hong Kong market closed on September 23, the Chinese government asked Evergrande to complete unfinished projects, reimburse individual investors, and avoid a short-term default on dollar bonds, as has first reported Bloomberg Law.

No indication has been given as to whether the government would be willing to step in and help, but experts believe it is in China’s best interest not to let it collapse.

According to Larry Hu, chief China economist at Macquarie, Chinese regulators will likely step in and help. However, it will be necessary to choose the right time to avoid excessive risk-taking while ensuring that the real estate sector remains stabilized, Hu writes in a report seen by. CNBC.

In a note to customers seen by MarketWatchUBS analyst Kamil Amin wrote that any market spillover depends on the restructuring or complete liquidation of Evergrande, although he is confident it will be the first.

Tom Essaye, founder of Sevens Report Research, wrote in his note to clients that “there really is no risk of global contagion with Evergrande because ultimately, and as far as we know, the loans in Evergrande were granted by Chinese banks which are implicitly supported by the Chinese government ”. The government’s balance sheet is expected to be able to “handle the losses” (around £ 300bn) of Evergrande, Essaye said.

Even Fed Chairman Jerome Powell intervened, saying Evergrande’s problems are unique to China. The only concern is how the situation will affect global confidence.

Many analysts also agree that the Evergrande crisis is not a Lehman Brothers moment for one key reason: Lehman Brothers held financial assets and Evergrande owns land.

How is the Evergrande crisis affecting cryptocurrencies?

The longer the crisis lasts, however, the more the cryptocurrency market will be pulled down. Like Jim Cramer, the host of CNBC Crazy money program, explained, one of the largest cryptocurrencies is tether, a stablecoin that is backed by various holdings, including commercial paper.

Although Tether’s issuers have said it has never held any commercial paper or debt issued to Evergrande, Cramer is concerned that many Chinese companies are “crushed by this fiasco, and it could cause real problems.” [for cryptocurrencies] if the dominoes fall here ”.

After that ?

Despite its deal on domestic debt allaying immediate fears of a collapse, all eyes will be on if and when Evergrande decides to repay part of its dollar coupon. Investors will also be very careful about whether and when the government steps in and in what form the support will come.

Until these things become clearer, the markets might remain nervous.