Stock markets plummet on Monday . . .
On Monday, the world stock markets saw their worst day in weeks. The Dow Jones Industrial Average fell 2.28 per cent, the S&P 500 decreased by 2.29 per cent, and the Nasdaq dropped 2.71 per cent. The cause? China’s Evergrande, a large real estate company, missed a US$80-million interest payment on its debts. This sparked fear among investors that the company may default, severely impact China’s financial system and consequently markets around the world. Evergrande has borrowed a large amount of money (around US$300 billion) from 171 domestic banks and 121 financial firms globally.
Some relief for investors . . .
Yesterday, the People’s Bank of China injected US$13.9 billion into the banking system, and Evergrande announced that it had “resolved” an interest payment that was due on one of its domestic bonds. These two announcements spurred cautious optimism in investors, and Evergrande’s stock rebounded about 32 per cent on Thursday. However, the real estate giant is not yet in the clear – the company has another US$83.5-million payment due today, and there has been no announcement on whether that payment has been made. The company also has a US$47.5-million interest payment due next Wednesday.
Bail out unlikely . . .
A senior China economist for London-based economic research consultancy Capital Economics has stated that while “the sentiment is a lot better after the news from yesterday,” Evergrande is still “a long way from resolving its problems.” Indeed – despite yesterday’s optimism, the Wall Street Journalreported this morning that according to officials familiar with the situation, “Chinese authorities are asking local governments to prepare for the potential downfall of China Evergrande Group.” This signals that it is unlikely Beijing will bail out Evergrande – meaning the real estate company is on its own. At this point it is unclear what will happen and whether (or when) Evergrande will default – either way, it is a dynamic situation with global implications.