The situation of Evergrande, a Chinese property conglomerate that has been in the news for months over the financial crisis, has spiraled, contagiously spreading like a virus across markets around the world.
But as the Evergrande crisis rattles economies, it shows the level of impact Chinese companies can exert globally, and inadvertently presents China with its most challenging economic crisis in recent times.
Evergrande is China’s second-biggest real estate developer, but in a debt mess of $300 billion owed to contractors, investors and home buyers. The company is afraid it will default on its payment of about $100 million due Thursday, and has warned investors that it isn’t sure of anything even though it’s hoping to get around the crisis with the help of newly hired financial advisers. The shares of the property conglomerate has been plummeting following the financial woes, now it is extending to other markets including bitcoin.
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Edward Moya, senior market analyst of the Americas at Oanda, wrote in a note to clients on Monday that the impact of Evergrande on bitcoin shouldn’t surprise anyone, after all, it’s no different from other assets.
“The fallout from the Evergrande is putting a tremendous dent in risk appetite that is sending everything lower.
“So it should not surprise Wall Street they are the first asset sold in the beginning of China-driven market selloff,” as investors aim to cash in, he added.
Shares of Evergrande fell 5.7% in Hong Kong on Tuesday, extending Monday’s losses of 10.2% lower in Hong Kong on Monday, a slight recovery after being down 19% in the morning, hitting an 11-year low.
Bitcoin has been rallying out of the biggest crash in years that saw billions wiped off in investment, triggering a massive selloff that plummeted the value of the cryptocurrency market by more than a half. Last month, bitcoin hit $50,000 again after weeks of crawling between $30,000 and $40,000. Though it dropped below $50,000 shortly after, the recovery rekindled the hope of investors who have been betting on the projection that bitcoin will hit $100,000 before the end of the year.
Other cryptocurrencies aren’t spared either. Ethereum and dogecoin have each declined 4.4% and about 6%, respectively, in the past 24 hours.
The Evergrande virus got the strength to rip through the world’s economy through the massive amount of money it borrowed. Now investors are afraid that the exposure that banks might have to Evergrande and companies like it will wreak further havoc on markets.
Other large Hong Kong property stocks such as New World Development and Henderson Land were also seeing double-figure drops in their prices on Monday. US banks are also affected. Goldman Sach (GS) and JPMorgan (JPM) registered among the Dow’s worst performers.
On Wall Street, the Dow Jones Industrial Average .DJI fell 466.43 points, or 1.35%, to 34,118.45, the S&P 500 .SPX lost 65.12 points, or 1.47%, to 4,367.87 and the Nasdaq Composite .IXIC dropped 267.52 points, or 1.78%, to 14,776.45 on Monday.
Hong Kong markets have been severely caught in the mess as Chinese banks, insurers and other real estate companies take hits. The energy and solid minerals markets got hit too. In Australia, the benchmark ASX200 index closed down 2.1% on Monday afternoon as investors dumped mining stocks such as BHP and Rio.
The price of iron ore, Australia’s main export, fell 60% to below $100 a tonne from its high point in May.
In Europe, mining stocks were badly hit. Stock markets fell on Monday morning, with the FTSE 100 index dropping 1.75%, or 120 points, to 6842, a two-month low.
The selloff on Monday, triggered by Evergrande, has seen a cumulative $2.2 trillion of value being wiped off the market capitalization of world equities from a record high of $97 trillion hit on Sept. 6, according to Refinitiv data.
“Any downturn in China would have significant implications for commodities demand given its status as the world’s largest consumer of many minerals and metals. The situation also has uncomfortable echoes of 2015 when fears about Chinese debt prompted a big and broad-based market correction, said the AJ Bell investment director, Russ Mould.
Though US stocks are seeing a comeback on Tuesday as investors meet with the Feds and central banks across countries hold meetings in hope of making tightening decisions, concerns remain. Beijing has been uncomfortably silent, and without China’s intervention, Evergrande has little to zero chance in meeting its debt obligation on Thursday. And that means, the global economy still reeling from the shocks of the pandemic, will have a new crisis to contain.
Analysts say that, while leaders are looking to curb excessive risk-taking, they will probably work to prevent the issue from becoming unmanageable.
“The central government’s priority of social stability makes restructuring likely with haircuts for debt holders, but spillovers to other listed property developers means there will likely be a real economic impact on the real estate sector,” said National Australia Bank’s Tapas Strickland.
“To what extent Evergrande slows the growth momentum remains unclear.”
Evergrande was largely impacted by China’s housing reforms, spilling its financial predicament over. The recent crackdown on its tech industry that has seen many of its multibillion dollar companies lose massive value, suggests that China may not lift a finger to the rescue of Evergrande. But as the crisis puts the reputation of the second-largest economy in the world on trial, there may be a change of heart.