Evergrande causes concern in the stock market

An the financial markets, eyes are worriedly turned to the Middle Kingdom. The People’s Republic of China has been the growth engine of the global economy in recent years and especially during the corona pandemic. But now the world’s second largest economy is weakening due to regional corona outbreaks and disrupted supply chains: industrial production and retail sales grew more weakly in August than they have been for around a year.

Inken Schönauer

Editor in business, responsible for the financial market.

The industrial companies increased their production only by 5.3 percent compared to the same month last year, as emerged from the data published on Wednesday by the statistical office. Economists polled by Reuters had expected 5.8 percent, after an increase of 6.4 percent in July. The retailers only increased their sales by 2.5 percent. Here economists had assumed an increase of 7.0 percent. “The Chinese economic data for August were a big disappointment,” said Commerzbank economist Hao Zhou. “In view of the regional closures due to renewed corona infections, domestic demand in particular was weak.” Since Beijing has gradually loosened the corona restrictions since the end of August, the economy should look a little better again in September.

But the economic figures on the Asian stock exchanges were disappointing. In Tokyo, the leading Nikkei index fell by 0.5 percent to 30,511 points. The broader Topix index fell 1.1 percent. The Shanghai stock exchange fell 0.4 percent. The index of the most important companies in Shanghai and Shenzen lost 1.2 percent. In Germany, too, investors took cover. The German share index Dax stepped on the spot on Wednesday with 15,727 points.

Impending debt crisis in China?

The alarm bells are ringing in the German economy. “The risk of the Chinese real estate market overheating cannot be dismissed out of hand,” said Volker Treier, head of foreign trade at the German Chamber of Commerce and Industry (DIHK), the Reuters news agency. Should the bubble in the real estate market burst, consumption in China could suffer or construction, an important economic driver, could fail. China is the second most important sales market for products “made in Germany” after the USA: in 2020, goods worth around 96 billion euros were sold there.

Worried looks are given to a possible debt crisis in China. This is triggered by financial difficulties at the country’s second largest real estate developer, Evergrande. On Wednesday, according to a report by the Bloomberg news agency, the Chinese housing authority warned of payment defaults. Evergrande will not be able to service the interest on loans due on September 20, the Bloomberg report said, citing insiders. The company was in talks with financial institutions this week about a moratorium on interest rates and a possible loan extension.

The announcement of the impending default put the Evergrande bonds under pressure. After a price slide of more than 20 percent, trading in the bond, which runs until May 2023, was suspended on the Shenzen stock exchange. The bond, which runs until January 2023, also slipped by around 20 percent, while the price of the bond, which was traded in Shanghai until May 2024, fell by more than 20 percent. However, the exchange operator has not announced any trading suspensions for these stocks.

Worries about the future of Evergrande

Debt of the equivalent of more than $ 300 billion weighs on Evergrande. Since the beginning of the year, the Group’s share value has fallen by three quarters. The corporate bonds are sometimes only traded at a third of their nominal value. The rating agency Standard & Poor’s downgraded the credit rating of the company and its subsidiaries to the third lowest level “CC”. The liquidity and refinancing situation of Evergrande has deteriorated significantly, sales and cash levels have decreased significantly, explained the analysts from Standard & Poor’s. The outlook for the company’s credit rating is “negative”. This means that a further gradation can follow.

Investors are worried about the future of the group, experts already fear possible effects on the banking system and the real estate market in China. The rating agency Fitch was able to calm down a bit on Wednesday. Payment defaults at Evergrande are completely manageable for the Chinese banking system. However, smaller institutions are likely to see a significant increase in bad loans on their balance sheets. The Fitch analysts referred to a stress test by the Chinese central bank, according to which the average equity ratio of the approximately 4,000 banks in China would only decrease slightly if the number of default-endangered loans from real estate companies increased. Always referred to as a real estate giant, Evergrande is a conglomerate. More than 3.8 million jobs depend on it, around 200,000 directly. The founder Xu Jiayin is considered the fifth richest Chinese.

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