Dow Plunges 500 Points To Two-Month Low As Experts Fear China’s Great Recession Style Collapse

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Shares fell to their lowest level in months on Monday after Chinese real estate giant Evergrande warned it was struggling to raise the cash to pay interest this week, triggering a widespread global sell-off and fueling concerns about the potentially systemic risks that could arise if the world’s most indebted real estate developer begins to default on its massive $ 300 billion debt obligations.

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Highlights

The Dow Jones Industrial Average plunged 525 points, or 1.5%, to 34,060 by 11:00 a.m. EDT Monday, falling to its lowest level since July 20.

Meanwhile, the highly technical S&P 500 and Nasdaq fell 1.6% and 2.2%, respectively, with energy and industrials stocks posting losses.

“The bad news keeps coming,” LPL Financial Ryan Detrick said on Monday in a note on Evergrande’s growing problems, noting that the company suspended trading in its onshore corporate bonds on Sunday after credit analysts have warned against investing in it.

This development brings Evergrande “one step closer to restructuring or defaulting,” adds Detrick, noting that some analysts fear a default is “the first domino to fall, triggering systemic risk similar to when [investment bank] Lehman Brothers went bankrupt 13 years ago, “at the start of the Great Recession.

Although many Asian markets were closed for the holidays, Hong Kong’s Hang Seng Index suffered heavy losses, falling 3.3% to its lowest point of the year.

Key context

Evergrande, China’s second-largest real estate developer, told banks last week that it would not be able to repay its debt this month, pushing its shares down and causing China’s real estate sector to fall sharply. quickly spread to other industries. While U.S. stocks were largely immune to last week’s unrest, it quickly sank on Monday after Bloomberg said Evergrande could miss an $ 84 million interest payment due on Thursday.

Contra

While he acknowledges that Evergrande’s liquidity crisis could be “huge,” Detrick doesn’t think Evergrande can trigger a Lehman-style meltdown. Unlike investment banking, most of Evergrande’s debt is held in equity and equity funds, as opposed to banks or other major institutions, he notes. Additionally, Detrick believes the Chinese Communist government would likely step in to avoid a default if needed, and the company also has assets it can sell to settle its financial obligations.

Crucial quote

“The markets have been priced perfectly for a long time and in this September lull which appears to be quite seasonal throughout history, the markets are faced with what they hate most: uncertainty,” the advisor wrote. in heritage David Bahnsen, of the Californian group The Bahnsen. in an email from Monday, saying he saw no systemic risk to the global economy in Evergrande’s situation, but adding: “This market has seen almost no downside volatility for a long time, and a recoil was long overdue. “

Further reading

Evergrande’s fateful week and China vacation spotlight the yuan (Bloomberg)

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