OpinionEvergrande crisis is not entirely to blame for global market jitters

Name: Angry protest at headquarters of China Evergrande as property giant faces liquidity crunch
Uploaded: 2021-09-23T18:30:11.000Z
Duration: 2 min 28 s
Description: Angry protest at headquarters of China Evergrande as property giant faces liquidity crunch

The deepening liquidity crisis at China’s second-largest property developer is important only insofar as it feeds into a broader narrative around the slowdown in global growth and the risk of a major policy mistake

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A man stands near a map showing Evergrande projects in China on the wall of an Evergrande development in Beijing on September 21. Global investors are watching nervously as the Evergrande Group struggles to avoid defaulting on tens of billions of dollars of debt. Photo: AP

Nicholas Spiro

Published: 2:30am, 24 Sep 2021Updated: 7:31pm, 4 Oct 2021

Pinpointing the catalyst for movements in asset prices across the world is not easy, particularly when there is a lot of uncertainty over the direction of markets. Even when sentiment is bearish, and investors expect a sharp sell-off, there is often disagreement over the precise trigger for falls in prices.

The sudden drop in global stocks on Monday, with the benchmark S&P 500 index suffering its worst day of trading since May, was widely attributed to the deepening liquidity crisis at China Evergrande Group, the country’s second-largest property developer, and the world’s most indebted.

This was definitely the case in Hong Kong’s equity market. The Hang Seng Property sub-index plunged 6.7 per cent, its sharpest daily decline since May 2020, amid fears that Beijing may extend its clampdown on the real estate sector to Hong Kong.

The link between the further declines in commodity prices, particularly industrial metals, and the plight of Evergrande was also clear. China consumes half the world’s steel, with the real estate sector alone accounting for approximately one-fifth of global demand.

Iron ore prices, which are down a staggering 25 per cent this month, could suffer even sharper falls if the cash crunch at Evergrande ends up inflicting severe damage on China’s property market and the broader economy.

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Angry protest at headquarters of China Evergrande as property giant faces liquidity crunch

What was less clear, however, was the selling pressure in markets where the channels of contagion from China are much weaker. There was little reason for the Russell 2000 index – a gauge of smaller stocks in the United States with less international exposure than the S&P 500 – to fall 2.5 per cent.