World stocks tumble over Evergrande contagion fears

  • 20 Sep 2021

Evergrande, one of China's biggest developers, is on the brink of collapse as it wallows in debts of more than $300 billion.

People walk by a map showing Evergrande development projects in China at an Evergrande city plaza in Beijing, on September 15, 2021. ( AP )

World stocks sank as trading floors were gripped by contagion fears from the expected collapse of debt-plagued Chinese property giant Evergrande, with investors also on red alert over spiking wholesale gas costs. 

Sentiment is being dented by strong inflation, the Federal Reserve's plans to taper monetary policy, surging infections with the Delta variant of coronavirus, and signs of weakness in the global recovery.

Wall Street followed Asia and Europe down, with the Dow Jones Industrial Average shedding 1.7 percent at the open and the tech-heavy Nasdaq 1.8 percent.

Hong Kong earlier dived 3.3 percent, spearheading Asian losses, with Evergrande widely expected to default on upcoming interest payments this week.

Europe also tanked, with London losing 1.5 percent and Paris down 2.2 percent, while Frankfurt's newly expanded index dropped 2.6 percent in afternoon deals.

World oil prices pared earlier losses but remained lower on energy demand worries.

READ MORE: Trouble at China property giant Evergrande raises fear of contagion

Meltdown ramifications

In a sign of the risk aversion rippling through markets, China sovereign credit default swaps jumped to a near one-year high, while the cost of insuring against European corporate bond defaults leapt to the highest since late May.

China sovereign credit default swaps (CDS) jumped nine basis points (bps) from Friday's close to 45 bps, the highest since early October, IHS Markit data showed.

With all eyes on Evergrande, "Investors are not sure whether Chinese authorities will be able to contain the fallout from a possible disorderly collapse of the heavily indebted company," Thinkmarkets analyst Fawad Razaqzada said.

"This could have repercussions on many other companies. So, the contagion risks may be much wider than the markets currently expect," he added.

Evergrande, one of China's biggest developers, is on the brink of collapse as it wallows in debts of more than $300 billion.

Mining shares were hit hard because of the potential economic impact on China, which has a voracious appetite for raw materials.

"Any downturn in China would have significant implications for commodities demand given its status as the world's largest consumer of many minerals and metals," said AJ Bell analyst Russ Mould.

Concerns over energy crisis

Anxiety is also running high over spiking wholesale gas costs, fuelling global inflationary pressures and sparking concern from the world's biggest central banks.

Higher global wholesale power and gas prices have prompted concerns of high winter energy bills and shortages, having already forced some energy supplies out of business in Britain.

Against this backdrop, the Federal Reserve's monetary policy meeting this week will be particularly important, according to analyst Neil Wilson.

"Does a Chinese property collapse and energy crisis collide with expectations for a Fed rate hike next year and biting inflationary pressures?" he wrote in a note to clients.

"That would be a pretty nasty cocktail for risk appetite and I think these are the risks being priced into today's selling."

Back in Hong Kong, property companies and banks bore the brunt of heavy selling.

Evergrande stock briefly plunged almost 19 percent before ending down 10 percent, sparking similar losses for Henderson Land and New World Development.

The Hang Seng Property Index meanwhile dropped more than six percent, its worst performance since May 2020.

The selling was mirrored elsewhere in Asia, although Tokyo, Shanghai, Seoul and Taipei were closed for holidays.

Despite the growing crisis, the Chinese government has yet to step in to prevent Evergrande from going under.