The market continues its soft landing. Where’s the bottom? Let’s figure it out. The world financial authorities are seriously worried about the possible collapse of the Chinese financial and construction conglomerate Evergrande Group, whose shares fell to 11-year lows yesterday. Evergrande pulled down shares of other real estate developers and banks, as expected.
There’s more. It turns out that the company has an unaccountable amount of offshore bonds floating around the world markets. And also, most of these bonds belong to U.S. funds. In other words, a credit contagion has started in the world.
This is not a made-up term, it actually exists in the financial community to define the impact of one local market decline on all global markets.
Many U.S. funds and financiers woke up to the news that China’s Evergrande Group had lost a significant portion of its market capitalization. While Evergrande’s losses cannot bring down the economy on their own, it could cause a domino effect similar to the collapse of Lehman Brothers during the 2007-2010 financial crisis. The domino effect is called “credit contagion,” and signs of it are already being seen.
Other Hong Kong and Chinese real estate mega-giants are anticipating a collapse from Evergrande Group’s losses and the possibility of the firm defaulting. Shares of Hong Kong-based Henderson Land Development Co. have suffered a significant sell-off, and the developer’s insurance group has also seen its shares fall. The Hang Seng tech index fell significantly Monday morning as the news rattled markets.
Zero Hedge columnist Tyler Durden believes (https://www.zerohedge.com/markets/eight-bond-deals-pulled-evergrande-contagion) that the market expects China’s Evergrande Group to default on a number of payments, causing a significant domino effect in global markets.
When will that happen? The company plans to pay $83.5 million in interest on its offshore bonds maturing in March 2022 on Sept. 23, and then must pay another $47.5 million in interest on Sept. 29 for bonds maturing in March 2024. Evergrande Group has a one day grace period under the terms of the contracts. So a possible default will be announced within the next 7 days.
By the way, the Chinese government said that they were not going to bail out anyone, just like the Americans did. And that’s where U.S. Treasury Secretary Janet Yellen shook, asking to raise the debt ceiling as a matter of urgency. (https://www.reuters.com/business/us-treasurys-yellen-debt-default-would-permanently-weaken-america-2021-09-19/). Yellen believes that an Evergrande default is imminent, so the U.S. could default by October. By that time, the Treasury will have exhausted all the cash reserves it has and will be capped by the debt ceiling, the U.S. Treasury Secretary said.
This seems to be a second time with the Chinese and their infections. First they released a viral infection that infected the entire globe with Covid, and they themselves are doing fine, no infected. Now they are releasing a second, a financial infection that is about to shake the whole world.
Millions of defrauded shareholders in China are storming the Evergrande offices, but they will get nothing, moreover, they will not even get insurance because the insurance companies will sink along with the developers.
Janet Yellen is really excited. The new financial virus from the bankruptcy of the Chinese developer, not only will infect the whole world, but it could also lead to the default of the first economy in the world. So it’s too early to buy on the lows. The real bottoms are ahead.