Shares in the embattled Chinese property company Evergrande have plunged again as investors weigh up whether the group’s massive debt problems could trigger a broader sell off across all financial markets.
Evergrande shares closed 10.2% lower in Hong Kong on Monday, a slight recovery after being down 19% in the morning, hitting an 11-year low.
The company, China’s second-biggest developer which owes $300bn to contractors, investors and homebuyers, dragged the Hang Seng index down to its lowest point for nearly a year.
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 amid widespread expectation that Evergrande, which has been crushed by a Beijing crackdown on highly leveraged developers, will default on some of its repayments this week.
It is feared such a move could cause a possibly chaotic knock-on effect through the Chinese economy and beyond.
The contagion factor was most visible in Australia where 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, has fallen 60% to below $100 a tonne from its high point in May thanks to a slowdown in the Chinese property and construction sectors. If Evergrande collapses, the sector’s difficulties are likely to accelerate, sending iron ore lower still.
European stock markets fell on Monday morning, with the FTSE 100 index dropping 1.75%, or 120 points, to 6842, a two-month low, with mining stocks hit badly. Wall Street is also on track to fall when trading begins in New York.
“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.
Concerns about the Federal Reserve’s plans to phase out its huge monetary stimulus policy, surging Delta infections in the US, and signs of a slowdown in the global recovery are all being compounded by the Evergrande crisis.
The Fed’s policy meeting this week is being closely followed, with some experts predicting it could set a timetable for winding in its vast bond-buying programme put in place last year to support the economy and equity markets.
Officials have flagged they will begin tapering by the end of the year in order to keep a lid on inflation, though it is yet to indicate by how much and from when.
Wednesday’s announcement comes as several other central banks around the world also prepare to make decisions, with many now considering tightening.
The shift towards turning off the taps to financial markets comes as the Delta variant continues to spread quickly around the world, forcing some governments to reimpose lockdowns or other strict containment measures.
Among them is China, where a new outbreak is raising concerns about the effect on the recovery in the world’s number two economy, a key driver of global growth.
But despite the growing crisis with Evergrande, the government in Beijing has yet to step in to prevent it from going under. 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 economy impact on the real estate sector,” said National Australia Bank’s Tapas Strickland.
“To what extent Evergrande slows the growth momentum remains unclear.”