China Evergrande Group (EGRNF) shares slumped to a fresh 11-year low in Hong Kong trading Monday as the indebted property developer scrambles to find cash ahead of around $150 million in bond coupon payments due later this week.
Monday's 10% slump extends the stock's six-month decline to around 85% as investors dumped shares of the once-powerful developer -- which boasted a market cap of more than $50 billion at its 2017 peak -- amid a liquidity crisis that could threaten the nations multi-trillion property market.
Beyond the value of its plunging stock, however, lies a series of potential contagion risks that have investors in everything from European banks to U.S. steel companies closely tracking developments in Beijing and beyond this week as two key bond payments on September 23 look set to define the fate of one of China's most influential companies.
"Yields on Chinese dollar-denominated junk bonds are trading at levels not seen since March 2020 in the midst of the initial global COVID crash in stocks and credit," said Louis Navellier of Navellier & Associates. "That suggests that there is quite a bit of tension under the surface when it comes to the situation in China, which is a very different picture, not reflected in developed market stocks and bond market indexes."
"No doubt the Chinese tech crackdown is happening at a precarious moment for companies like Evergrande, which could tip the situation into crisis territory," he added.
The first major risk is, of course, a straight-forward slide into default by China Evergrande if its misses either of the two separate payments due Thursday. Such a move would trigger a technical default amongst its myriad creditors -- estimated at around 130 different financial institutions -- and wholesale writedowns of its estimated $305 billion in outstanding debts.
Up next, however, is the spillover impact into local government financing, which relies on the sale of land to property developers such as Evergrande to raise cash to meet day-to-day operational needs.
Further down the line, banks with direct exposure to Evergrande, via the parent company, the property services group or its new energy business, are vulnerable to significant writedowns that could clip lending growth into the broader economy just as data begins to suggest a notable second-half slowdown in the world's biggest economy.
On top of that, the largest test China may face in an Evergrande collapse is the mettle of President Xi Jinping's 'common prosperity' ambitions and his ongoing effort to reign in corporate profiteering across some of the country's biggest business sectors, including property, which he has famously said must be for "living, not speculating".
Last week, the state-backed Global Times newspaper said Evergrande shouldn't consider itself "too big to fail", suggesting Beijing may be willing to allow it to fall into administration instead of stumping up billions in financial support.
That might be a bet Xi is willing to make now, given the unpopularity of development companies in an economy where ordinary citizens are sitting on billions in mortgage debt amid a decades-long surge in property prices.
However, as the failure of Bear Stearns and Lehman Brothers demonstrated just over a decade ago, the resultant collapse in house prices that followed left home-owning Americans burdened with negative equity that strangled growth the consumer economy for years.
Should Xi blink and offer to prop up Evergrande as it negotiates with its creditors later this week, he'll still need to consider the cost of financial support for a group that owes at least $850 million in bond payments between now and the end of the year.
He'll also need to calculate the impact of a fire sale of commercial and residential properties at a time when hundreds of thousands of new developments remain unfinished, owing to a backlog of payments to workers and contractors.
That has implications for steelmakers like Cleveland Cliffs (CLF) - Get Cleveland-Cliffs Inc Report, which was marked 9.6% lower in late-morning trading Monday to change hands at $19.80 per share, as well as investment groups such as BlackRock (BLK) - Get BlackRock, Inc. Report, which fell 2.8% to $851.80 each.
Bitcoin, too, was caught in the overall market tailspin, with prices down more than $4,000 each at one stage in the early New York session to $43,400 as analysts estimated that Asia holders pared cryptocurrency exposures in order to meet potential margin payments on falling property prices.
Others, however, are confident China can firewall the impending failure of its biggest property developer.
“On its own, a managed default or even messy collapse of Evergrande would have little global impact beyond some market turbulence,” said Simon MacAdam of London based Capital Economics. “Even if it were the first of many property developers to go bust in China, we suspect it would take a policy misstep for this to cause a sharp slowdown in its economy.”
"In a hard-landing scenario, several emerging markets are vulnerable," he added. "But in general, the global impact of swings in Chinese demand is often overstated."