Evergrande contagion threat hits global stock markets

Hong Kong’s stock market slumped on Monday in a decline that spread to European bourses as an escalating liquidity crisis at Chinese property developer Evergrande showed signs of spreading beyond the sector.

Chinese and Hong Kong property groups were at the centre of the market slide, falling to the lowest levels in half a decade amid rising angst over the fate of Evergrande, the world’s most indebted property developer.

The group faces obligations of more than $300 billion (€255 billion) to creditors and other businesses, and a crucial interest payment deadline on its offshore bonds looms on Thursday.

Sell-off

Evergrande’s Hong Kong-listed shares fell as much as 18.9 per cent on Monday. The drop underscored concerns about the broader health of China’s real estate sector and 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 level since 2016.

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Hong Kong’s broader Hang Seng index fell 3.5 per cent, taking the benchmark down almost 12 per cent for the year. European markets also dropped, with the region-wide Stoxx 600 down 1.7 per cent and markets in Germany and France shedding 1.9 per cent and 2 per cent respectively. London’s FTSE 100 lost 1.3 per cent.

S&P 500 futures slipped 1 per cent, signalling that the selling could spread to Wall Street when equities trading reopens in New York. The Vix, Wall Street’s so-called fear gauge which measures expected volatility on the S&P, hit 24.5, around its highest reading since May 12th.

“It’s too early to talk about contagion [from Evergrande] but it’s just another datapoint on what we’ve already seen in China that is souring risk sentiment,” said Anthony Collard, head of investments for the UK and Ireland at JPMorgan’s private bank.

Price

Evergrande, whose share price has tumbled since it warned of the risk of default last month, said senior executives would suffer “severe punishment” after securing early redemptions on investment products it later told retail investors that it 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.

“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 markets had become 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?” Mr 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 Rmb63.1 billion (€8.3 billion) of exposure to the country’s real estate stocks across its Rmb3.8tn of insurance funds.

Slowdown

Signs of a slowdown across China’s property sector have also hit iron ore prices, which reached a record this year but slumped last week after markets digested the impact of government curbs on steel production.

Iron ore prices had tumbled 20 per cent last week, their worst weekly performance since the financial crisis in 2008. On Monday, iron ore futures in Singapore fell as much as 11.5 per cent to below $100 a tonne for the first time in more than a year.

In turn, mining stocks were among the biggest fallers on the FTSE 100 at the London open, with shares in Anglo American dropping 6 per cent.

Exchanges in mainland China were closed for a public holiday, but FTSE China A50 index futures traded in Singapore fell as much as 4.3 per cent. – Copyright The Financial Times Limited 2021