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Sept. 20, 2021, 4:42 p.m. EDT

Evergrande fears sink stock market: Here’s what investors need to know about the teetering property giant

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By William Watts

Evergrande, a Chinese property giant nursing more than $300 billion in debt, remains on the brink of default — sending global equities tumbling Monday as investors, who had previously ignored the situation, sat up and took notice.

Fears of a bursting property bubble have long been a concern for investors when it comes to China. A heavily leveraged real-estate sector makes up more than 28% of China’s economy, according to the Financial Times. Questions surround how willing Chinese authorities will be to provide a backstop.

Meanwhile, holders of Evergrande’s approximately $19 billion in dollar-denominated bonds are left to wonder what will become of their investments, while other investors attempt to gauge the potential spillover effects a collapse could have on China’s property sector and global financial markets.

What’s happening?

Evergrande faces an $83.5 million interest payment Sept. 23 on its March 2-22 bonds and a $42.5 million payment on Sept. 29 on its March 2024 notes , according to news reports . Failure to settle those payments within 30 days of their due date would put Evergrande in default.

FitchRatings, a credit ratings firm, on Sept. 7 downgraded Evergrande’s rating to CC from CCC+, indicating they saw some sort of default as probable. Evergrande is one of China’s top three property developers, although the residential housing market is highly fragmented, Fitch analysts noted in a Sept. 14 report. Evergrande debt has seen a series of downgrades from all three major ratings firms.

What’s the reaction?

Through the end of last week, investors had noted the lack of reaction beyond China’s property sector to Evergrande’s woes. That changed Monday, when those worries were blamed for wobbles in global equities and across financial markets.

Markets in mainland China were closed Monday, but Hong Kong’s Hang Seng Index /zigman2/quotes/210598030/delayed HK:HSI +0.02% fell more than 3%. European equities also tumbled, while in the U.S., the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.11% dropped more than 600 points, or 1.8%, and the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.10% shed 1.7%.

Treasury yields fell, with the rate on the 10-year Treasury note /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -0.64% down 6 basis points as investors appeared to snap up safe-haven assets. Yields fall as debt prices rise.

What’s the risk?

Evergrande’s market share in 2020 was only around 4%. Fitch said the risk of significant pressure on house prices in the event of a default would be low, unless the restructuring or liquidation of its assets becomes disorderly. “Fitch believes this is something the authorities will want to avoid,” the analysts wrote.

But faith in that scenario may have been shaken after Reuters reported last week that the editor of the state-backed Global Times newspaper had warned that Evergrande shouldn’t assume it’s “too big to fail.”

S&P Global Ratings on Monday said a default by Evergrande would cause more than mere ripples in financial markets , but would be unlikely to lead to a tidal wave of defaults.

Analysts at UBS, led by Kamil Amin, said in a Thursday note that the potential for market spillovers will depend on whether Evergrande restructures or fully liquidates. The analysts wrote what they remained confident that a restructuring remained the most probable outcome.

“In the event of a restructuring, we expect the bonds to bounce off their lows and contagion to be broadly limited,” they said.

But in the event of liquidation, there would likely be a “high degree of contagion,” they warned. The spillovers would occur, they said, through three channels:

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