Evergrande is rocking the markets
Yesterday, US stock market indices (which measure average price movement) fell sharply. The S&P 500 and the Dow fell by 1.7%. While the NASDAQ fell by 2.1%.
September was already a rocky month for US stocks.
Cryptocurrency markets have lost about 10% or $250 billion in value. Bitcoin is down 10% and below $43,000. Ethereum is trading below $3,000. It is even worse for some of the smaller coins.
Is it coincidence or simply bad luck that Evergrande and Ever Given both share the word “Ever”.
Evergrande is the Chinese real estate company whose concerns about a debt default has rocked global asset markets, while Ever Given is a container ship that blocked the Suez canal in March this year disrupting global trade.
Should one sell whenever they hear bad news pertaining to “Ever”?
Why are markets in a state of panic?
Back to Evergrande. Evergrande is a massive company and China’s second largest property developer by sales, owning over 1000 properties in 280 cities in China.
That growth was fuelled by borrowed money to the tune of over $300 billion.
The Chinese government came up with a few rules on how much property developers can owe. The property markets over there have been running hot for a while.
Evergrande was forced to sell some of its properties at a discount to stay afloat. However, that is not enough. It is struggling to meet interest payments and has twice given notice it may have to default. Default means it will not be able to pay what it owes as at when due.
Due to its massive size, and the world being a global village, it owes money to a lot of people. Evergrande reportedly owes over 171 domestic banks and 121 others. Major banks.
A default would have a huge impact on the Chinese financial system and more importantly, the global system. It would make borrowing more expensive. Also, no one really knows the depth of exposure some banks have.
So where do things go from here? It is hard to tell.
The Chinese government seems unwilling to bail out Evergrande (for now). Chinese equity markets are closed for holidays, and stocks could tumble when they open tomorrow.
What matters is how things shape out in the long term.