The Tell: Why Evergrande has suddenly exploded into a potential global financial market crisis

It is the non-COVID, non-inflation risk that is been lurking in the global backdrop for months: A looming default by Chinese property developer Evergrande Group

On Monday, this somewhat obscure, overseas risk suddenly shook up financial markets from Asia to Europe and the U.S., where all three major benchmark stock indexes, the S&P 500
Dow industrials

and Nasdaq Composite

appeared to be headed for the worst one-day drop in more than two months. Though it is certainly not the only reason U.S. stocks slid, Evergrande was a factor behind investors’ risk-off mood.

Read: Evergrande fears send stock market tumbling: Here’s what investors need to know about the China property giant

On one level, Evergrande—which reportedly faces at least $83.5 million in interest payments due on Thursday, with a 30-day grace period — is raising concerns about a liquidity crisis among all Chinese and Hong Kong property companies, as markets quickly turn off access to dollar funding. In a more macro way, the firm’s woes are bringing to the fore China’s wide-scale regulatory crackdown across most of its businesses, starting with technology giant Alibaba Group Holding Ltd.
which is rattling confidence in the world’s second-largest economy.

China’s crackdown on property developers, without a known endgame, is what’s sapping liquidity from thinly traded securities, like Evergrande bonds, which are held in passive emerging-market-index exchange-traded funds and separately managed accounts at U.S., European and Asian money-management firms.

Some of the firms with significant holdings of Evergrande bonds are Ashmore Group PLC

and HSBC Holdings PLC
both of London; BlackRock Inc.
based in New York; and UBS Group AG

of Zurich.

“The spillover that is happened to other markets is somewhat notable,” Ben Emons, managing director of global macro strategy at New York-based Medley Global Advisors, said via phone Monday. In particular, he said, the global stock selloff was accompanied by falling iron ore prices because of China’s stepped-up restrictions on industrial activity.

Markets will now be watching for whether the People’s Bank of China, will inject liquidity “tactically” Wednesday night, Emons says. The timing of all this comes as some investors are also bracing for a potentially hawkish outlook from the Federal Reserve on Wednesday, and many have been waiting for a significant pullback in the S&P 500 during the month of September.

This post was originally published on Market Watch

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