📉Evergrande Crisis Sending Flu to the Equity Market

Wall Street had a tough Monday as significant indices dived sharply. Investors are focusing strongly on China and whether there will be a rescue package for the highly indebted Evergrande. As of now, it appears that state bailout is not on the horizon.

The $300 billion of liabilities has soured sentiments across the region as debt obligation appears too tricky, and the default is likely. Moreover, the contagion effects are likely to linger for some time as banks and insurers seem to be badly hit as some had already announced making provision on loan loss.

With markets closed in China, Japan and South Korea due to holidays, the thin liquidity amplifies the sell-off. Cryptocurrency is unshielded as it tumbled together with the massive fears roaming across different asset prices.

💎Why is Evergrande a Global Financial Scare?

It appears that the fall of the property giant has a profound impact on the financial market. China, on its part, had warned banks that the company was unlikely to pay its debt obligations. As a result, the Chinese central bank has taken proactive steps to minimise potential liquidity risks by injecting around $14B into the banking system.

The uncertainty of how China will and should handle Evergrande is releasing panic as people perceive inaction by the Chinese government as a signal of the green light for the company to collapse.

It does not help that a state-owned newspaper wrote on the idea that Evergrande should not be expecting a bailout based on the “too big to fail” assumption, further casting a shadow on the fate of the property giant.

⏰Restructuring or Liquidation?

Pika World believes this is a reasonable credit default given the due date of some debt obligations is looming. However, the extent of the spillover damage is contingent on whether we see the company facing restructuring or liquidation.

We believe that restructuring can provide a better outcome for all stakeholders. The liability of $313 billion is roughly 6.5% of the holistic liability within the Chinese property ecosystem, and $19 billion is from offshore bonds. Hence, if liquidation happens, the spillover effect is likely to be massive and result in possible 3 mega hurt points.

First, it will dent confidence in the property sector and the high yield offshore debt and no doubt set to hurt other financial assets in China.

Second, it could spring into other defaults as corporations or banks that have significant exposure to the Evergrande could do underwater.

Lastly, we are likely to see a material change in how credit-rating firms view mega-companies based on the stereotypical assumption that state support is always available for offshore US dollar bond markets coupled with onshore markets for various core sectors of the economy.

💡Likelihood of Government Assistance?

If we recall, in 2019, the Chinese central bank did intervene in the takeover of Baoshang Bank, which caused credit conditions to sour and in times when there was a massive collapse of Chinese equities and its currency in 2015.

The key idea is that the Chinese government may be more ready to allow some forms of distress in financial conditions and intervene only when a significant default movement occurs. This, thus, may cause anxiety as the fallout develops.

🔑Commodities Prices Facing Pressure

As Chinese Premier Li Keqiang announced the country conviction to stabilise commodity prices, prices of contract futures for copper, platinum and palladium fell sharply. Brent Crude futures also dived.

As we understand in the past, when the Chinese government looks to cool commodity prices, they tend to release strategic reserves of metals and oils to support a higher supply level and put pressure on prices.

Pika World expects the Chinese government to take a more concerted effort to cap prices of key commodities

📮What’s on the Menu Today?

At 8.30 pm, we will receive the Building Permits for August, which is expected to remain stable at 1.6M.

It is 21 September, Tuesday, at 7.55 am in Singapore and 7.55 pm in New York. It is a roller coaster start of the week, and we hope all friends of Pika World have a safe landing.