6.12.2021 – Special Report. This week should be really exciting: The negative factors for the stock market are piling up. First, last weekend, the warning of the Omikron variant. Then the indirect announcement of a faster tapering by Fed Chairman Jerome Powell. And just now, Evergrande has come forward again: The teetering property developer has warned of a default.

Evergrande teeters on the precipice  

There it is again, the ailing Chinese developer that has been churning out vacant prefab buildings en masse: Evergrande said late Friday night that after a review of its financial resources, it could give no guarantee that the real estate giant has sufficient funds to meet its financial obligations. Oops…. Evergrande’s penny stock lost another 20 percent or so Monday, while the Hang Seng slid about 2 percent.

With debts of about $300 billion, Evergrande is one of the most indebted real estate companies on the globe. Half a Lehman Brothers, so to speak. But that’s not all: If Evergrande topples, some banks that had lent money to the giant will fall over. And municipalities that had done the same. This would be joined by the collapse of many construction companies.

Red alert for politicians  

The government of China’s Guangdong province, where Evergrande is based, said it had sent a task force to the group to “mitigate risks and protect the interests of all parties involved.” In addition, Xu Jiayin, Evergrande’s chief executive, had been cited for talking to authorities. Further, the provincial government said China’s stock market regulator was trying to allay fears about a spreading crisis. It said the impact of Evergrande’s operations could be controlled. Well then…

Impending construction infarction

As early as a week and a half ago, Premier Li Keqiang called on the State Council, which is the cabinet, to get regional governments to build more, the state news agency Xinhua reported. Since it needs money to do so, local governments should issue new bonds. The problem: There is no longer a need for new construction. How could there be, with all the vacancies and ghost towns? Still, according to a Citibank analysis, bond volume is expected to rise from 3.65 to 4 trillion yuan (about $630 billion) next year. Goldman Sachs also reported that many cities had relaxed mortgage regulations.

The market is trembling

It remains to be noted that in addition to Evergrande, Turkey could also slide into insolvency quite quickly – and it has reached about the debt level of Lehman Brothers. Thus, it may well be that the bears are having a real feeding fiesta. And that the recent correction is far from over.

But perhaps Beijing will step in to save the day. It may also be that the overall market is supported because the Federal Reserve changes course, since it should not be over yet with all the cheap money in view of the crises. The overall situation remains – as always – exciting, that’s the beauty of the stock market. Bernstein Bank keeps you up to date!

 


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