How Evergrande Tanked the Markets This Week
Yesterday, traders came to their desks to an unpleasant surprise. Specifically, most stock markets were trading down and safe-haven assets were on the rise.
Some of the losses were later recovered, with a couple of US indices trading marginally in the green. But sentiment going into the weekend is once again negative.
Several media reports have been pointing to the potential of a taper announcement, as a simple, superficial explanation.
That said, the Fed will host their Jackson Hole Symposium next weekend, where a dwindling minority of people expect a taper announcement. This could weigh a little on sentiment. Nonetheless, analysts are largely pricing in a taper at some point in the near future.
It’s not just one thing, but…
Like with most big moves in the markets, there were several factors joining forces.
The most relevant was the Chinese regulators’ announcement that they were looking into the housing industry. The reason it set off alarm bells is that home builders in China are massively leveraged, with Evergrande not only being one of the biggest developers, but also the one with the most debt.
Reportedly, the CBIRC will be compiling a list of banks with high real estate debt. Presumably, this means that the government will issue requirements to reduce exposure.
It’s not the first time this has happened, as demand for housing in China has pushed the market beyond what analysts would normally consider a bubble in most countries.
It’s not just one sector
The concern is that if a major company like Evergrande were to default or have credit difficulties, it could have a domino effect for other major enterprises.
More worrying, however, is that Chinese regulators are looking into loans. This suggests that it might become more difficult for businesses to obtain credit, and this could slow growth.
On top of that, President Xi called for more wealth redistribution. While we can interpret this as a political comment, it raises the question of what the government plans to do about the situation. For example, they could raise taxes.
Additionally, China has been spending a lot more than usual to deal with covid. And the government might have to raise taxes to help pay for it. This is another factor that could weigh on economic growth.
Will it last?
Hong Kong stocks closed at 9-month lows.
This is because the government decided to postpone a law requiring companies to refuse compliance with sanctions. Reports that China is building a new military base between the mainland and Taipei also weighed on geopolitical sentiment.
As mentioned, concerns over the housing industry and tightening lending rules have happened before. The risk-off situation ameliorated in the medium term as the Chinese economy remained robust.
However, with the risk of delta and the impending tightening of monetary policy around the world, it might have a longer-lasting effect.
The key will be to see what the CBIRC announces when they compile their list, expected within the next couple of weeks.
But, if the Fed were to hold off on the taper, we don’t get much negative news over the weekend. The drop might turn out to be a buying opportunity and we could get a relatively quick bounceback.