By Feuer
Shares of Chinese property developer Evergrande Group tanked 10 percent on Monday in Hong Kong trading as heightened fears that it may default on its debt rippled across stock markets around the world.
Shares of Shenzhen-based company – which has amassed more debt than any other real estate developer in the world – finished the day in Hong Kong at HK$2.28 per share, after earlier plummeting 19 percent to its lowest value in more than a decade.
The stock’s now down 84 percent so far this year.
Evergrande accrued the sky-high debt after it used loans to fuel an aggressive expansion over the past decade.
The pressure on the stock now comes as the company has warned that it may be unable to meet debt payments that are due this week and could be forced to default.
If the massive developer defaults on its $300 billion in liabilities, it could lead to major fallout in China’s financial sector – and potentially threaten other markets around the world.
The company reportedly owes money to hundreds of Chinese banks and foreign financial firms.
Concerns about Evergrande pressured trading across the board in Hong Kong on Monday, with shares of other property developers and insurers also dropping. The Hang Seng benchmark finished the day down 3.3 percent.
And stocks continued to fall as the US markets opened, with the Dow Jones Industrial Average last seen trading nearly 500 points, or 1.4 percent, lower. The S&P 500 and the tech-heavy Nasdaq were down 1.5 percent and 2 percent, respectively, as of 10:30 a.m. ET.
The impending fall of Evergrande and the subsequent shock to China’s financial sector it could cause is now even drawing comparisons – warranted or not – to the collapse of Lehman Brothers 13 years ago.
However, there are important differences between the two situations, analysts at LPL Financial said in a note Monday.
Lehman held a far more significant position on the books of other financial institutions before its collapse than Evergrande does, LPL financial said, adding that Evergrande has more “hard assets” than Lehman did to settle its debt without cash.
And while the Chinese government has yet to step in, LPL analysts said they think Beijing will get involved if there’s a default.
“Although the impact from Evergrande’s liquidity crisis is enormous, the good news is the fallout hasn’t started to spillover to other markets,” LPL Financial chief market strategist Ryan Detrick said.
“Short-term funding markets are acting just fine in China thus far; remember, it was the money markets in the US that first started to show cracks in the system in early 2008, well before the wheels fell off,” he added.
Ed Yardeni, president of Yardeni Research, echoed that point in a note to clients on Monday, saying that a better comparison than Lehman is the fall of Long-Term Capital Management in 1998.
In that case, the US Federal Reserve bailed the firm out, limiting the damage to financial markets.
“As a systemically important developer, an Evergrande bankruptcy would cause problems for the entire property sector, which has been an important source of economic growth and jobs in China,” Yardeni said.
“We expect that the Chinese government will restructure Evergrande, probably by splitting up its businesses among other property developers,” he added.
