The liquidity crisis at Chinese property developer Evergrande shook global stock markets on Monday, with shares falling in Asia, Europe and the US.
On Wall Street the S&P 500 fell 2.7 per cent in mid-afternoon trading, putting the index on track for its worst day of trading in almost a year. The sell-off hit the entire market, with all but around a dozen stocks in the benchmark index in the red. Energy stocks were the worst hit, along with financial groups and companies that produce basic materials.
The technology-heavy Nasdaq Composite slid 3.3 per cent. The CBOE Volatility index, or Vix, which measures expected volatility on the S&P and is known as Wall Street’s “fear gauge”, hit 28.2 — its highest level since May.
Monday’s sell-off came after shares in Evergrande, the world’s most indebted property developer, closed 10 per cent lower in Hong Kong to hit their weakest level since May 2010.
Concerns about the broader health of China’s real estate sector triggered a wider sell-off, sending the Hang Seng Property index, which tracks a dozen listed developers, down almost 7 per cent to its lowest point since 2016. At 24,099 points, Hong Kong’s broader Hang Seng index closed at its lowest level since October last year.
Evergrande has obligations of more than $300bn to creditors and other businesses. An interest payment deadline on its offshore bonds looms on Thursday.
US and global stock markets have repeatedly hit record highs this year, but had already begun to slip this month due to rising concerns about slowing economic growth and the potential for central banks to begin withdrawing stimulus measures.
David Donabedian, chief investment officer of CIBC Private Wealth, which manages about $92bn of investments, said: “There are some specifics to [Evergrande] that cause concern, but it also feeds a general narrative that global growth is slowing . . . The potential fall of a major company in a major industry feeds that perception that the Chinese economy and global economic recovery could be further slowed.”
Evergrande’s share price has tumbled since it warned of the risk of default last month. The company said senior executives would suffer “severe punishment” after securing early redemptions on investment products it later told retail investors that the company could not repay on time.
Trading in Hong Kong indicated that the deepening fears for the property sector were dragging on other developers and financial institutions.
Johan Grahn, vice-president and head of exchange traded funds at Allianz IM, said he expected the direct impact of Evergrande’s woes to be limited in the US, but said the trouble was “almost like the straw that broke the camel’s back” after weeks of rising concerns about the strength of the economic recovery, inflation and the impact of the Delta coronavirus variant.
“If you’ve been thinking about taking some chips off the table for a long time, today looks like a good day to actually take action,” Grahn said. “The big question is going to be whether we will see the dip buying continue, or if it is going to be a longer downdraught.”
Like US stocks, European markets also dropped on Monday, with the region-wide Stoxx 600 down 1.7 per cent.
In debt markets, the yield on the 10-year US Treasury note, which moves inversely to its price, dropped 0.06 percentage points to 1.31 per cent, driven by haven-buying. Germany’s equivalent Bund yield slipped 0.04 percentage points to minus 0.32 per cent.
The gloomy sentiment also dragged down the value of corporate debt. A widely watched ETF that tracks lower-rated, “high-yield” bonds and is known by its ticker HYG dipped 0.4 per cent in US afternoon trading, on course for its worst one-day decline in two months. The cost of insuring high-yield debt from default in the derivative markets also rose sharply, in a further sign of investor nervousness.
“Evergrande is just the tip of the iceberg,” said Louis Tse, managing director at Wealthy Securities, a Hong Kong-based brokerage. Chinese developers were under substantial repayment pressure on dollar-denominated bonds, he added, while financial markets had grown nervous that Beijing would push listed real estate groups to cut the costs of housing in mainland China and Hong Kong.
“That affects the banks as well — if you have lower property prices what happens to their mortgages?” Tse said. “It has a chain effect.”
Shares in Ping An, China’s biggest insurer, fell as much as 8.4 per cent on Monday, after closing down 5 per cent on Friday as it was forced to disclose that it held no exposure to Evergrande debt or equity. Ping An has Rmb63.1bn ($9.8bn) of exposure to the country’s real estate stocks across its Rmb3.8tn of insurance funds.
Evergrande’s $4.7bn bond maturing in 2025 slumped below 25 cents on the dollar for the first time, as fears over the company’s collapse intensified. The bond traded above 80 cents as recently as May.
Ming Tan, a director at the credit rating agency Standard & Poor’s who follows Chinese banks, said Evergrande defaulting on its debts was unlikely to cause a credit crisis in the world’s second-largest economy “by itself”.
“Banks’ exposure to Evergrande is quite distributed across the sector,” he said. The main risk for China’s financial system would be “other highly leveraged developers to default at the same time”, he added.
Metal prices also fell on Monday as concerns grew about the impact on commodity demand of a pullback in the Chinese property market.
Iron ore dropped below $100 a tonne for the first time in more than a year. The steelmaking commodity that is a source of profit for major miners has plunged 23 per cent over the past week.
In turn, mining stocks were among the biggest fallers on the FTSE 100 in London.
Exchanges in mainland China were closed for a public holiday.
Additional reporting from Henry Sanderson and Neil Hume in London and Joe Rennison in New York