The Evergrande Crisis in China has sparked a sell-off in global stock markets, with the Dow, S&P, and Nasdaq all correcting by nearly or over 2% on Monday and Tuesday, while Asian markets were mixed on Tuesday as the liquidity crisis continued to weigh on investor sentiment.
The Hang Seng in Hong Kong hit a new 11-month low, while the Nikkei in Japan dropped over 2% after returning from a market holiday.
In offshore trade, China’s yuan held steady, recouping some of the losses that had brought it to a three-week low on Monday.
Evergrande’s stock has fallen 8.47% this week as investors’ attention shifted to Thursday when the business is scheduled to make bond interest payments.
The Evergrande Group is China’s second-largest real estate property developer. Over the years the company has taken on debt worth $305 billion.
In a major test, the company is supposed to pay $83.5 million in interest on its bonds on Thursday failing which the bonds would default. The company’s bonds have dropped to $0.25 on the USD.
Chinese authorities have appointed advisers to look into Evergrande but have provided no public assurance so far.
Is Evergrande Crisis in China a Lehman Moment?
Is China’s Evergrande Group’s financial issue becoming a Lehman moment, with worried foreign investors concerned about default risks? Citigroup Inc., Barclays Plc, and UBS Group AG strategists disagree.
The market situation, according to Barclays analysts, isn’t similar to what occurred during the fall of Lehman Brothers, UBS claims default levels are low compared to the size of China’s economy, and Citi expects policymakers to intervene.
According to analysts, it is unlikely to overtake China as the world’s largest economy.
“The conditions are simply not in place for even a large default to be China’s Lehman moment,” Ajay Rajadhyaksha, a macro strategist at Barclays in New York, wrote in a note on Monday.
For that to happen, they said, there would have to be a dramatic increase in credit distress outside of the real-estate sector, banks unwilling to face each other, and massive policy blunders.
Uday Kotak, India’s top banker and CEO of Kotak Mahindra Bank, compares the Evergrande issue to the 2008 Lehman Brothers bankruptcy. He compares the current situation to India’s IL&FS debacle, which sparked a liquidity crisis in the financial services business in 2018.
We can also see that the market is factoring in all this fear, uncertainty and doubt (FUD).
Impact on Markets of Evergrande Crisis in China
“Concerns are being expressed whether this might turn out to be China’s Lehman moment. This appears far-fetched now since Evergrande’s debt is not widely held and, therefore, is unlikely to lead to contagion with systemic risks. The recovery in Dow is an indication of the market’s confidence that contagion is unlikely.
However, investors have to be cautious since markets are richly valued and, therefore, vulnerable to corrections. The ultimate impact of the Evergrande crisis is yet to be seen and known,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
For what it means for India, Vijayakumar said that “there is another view that the Chinese crisis- the regulatory crackdown earlier and the Evergrande crisis now- bode well for India, facilitating increasing capital flows to India. This may play out in the medium to long-term.”
Evergrande’s Debt Crisis
With more than $300 billion in liabilities, equivalent to 2% of China’s GDP, China’s second-largest developer is rushing to acquire funds to pay its numerous lenders and suppliers.
Investors are nervous about the possibility of a disastrous failure reverberating through China’s property sector and everything connected to it, including banks and the broader economy.
Evergrande employs 200,000 people and operates in over 280 cities throughout the world. It also has a division dedicated to electric vehicles, as well as interests in tourism, digital operations, insurance, and health care.
Last year, the government began to unveil a series of steps to address a troubling debt mountain built by property corporations as part of a campaign to resolve the problem.
Evergrande’s capacity to finish properties and sell them to repay its debts has been significantly hampered as a result of this.
