Investors from three continents abandoned their shares on Monday, fearing that the governments of the world’s two largest economies – China and the United States – would act in ways that could undermine the nascent global economic recovery.
The Chinese government’s reluctance to step in and rescue a heavily indebted real estate developer just days before a big interest payment is due has signaled to investors that Beijing could break with its long-standing policy of bailing out its local stars .
And in the United States, the world’s No.1 economy, investors feared the Federal Reserve would soon start cutting back on its massive government bond purchases, which had helped stocks hit a series of record highs since. the start of the coronavirus pandemic.
The sale started in Asia and spread to Europe – where exporters to China were criticized – before landing in the United States, where stocks appeared to be heading for their worst performance of the year before. a rally at the end of the trading day. The S&P 500 closed 1.7% lower, its worst daily performance since mid-May, after losing as much as 2.9% in the afternoon.
The catalyst for the fading was the continuing turmoil at the China Evergrande group, one of the country’s top three residential property developers. The company has an estimated debt of $ 300 billion and an interest payment of more than $ 80 million is due this week.
Analysts said Evergrande’s fate was severe enough that he was unlikely to survive without the support of the Chinese government. “The question is to what extent are there the risks of an overflow in Chinese stocks and then a waterfall in global markets,” said John Canavan, chief analyst at Oxford Economics.
Few entities are moving the markets like the US and Chinese governments can, through their actions and inaction, and Monday’s global fall made this clear. Until recently, investors seemed content to ignore a variety of issues complicating the recovery, including the emergence of the Delta variant and supply chain grunts that plagued consumers and manufacturers alike.
But as of this month, as Evergrande began to falter and the likelihood of a cut – or cut – in its bond buying programs increased, the protective market bubble began to deflate. . Some U.S. investors are also concerned that tax hikes are on the horizon – including on share buybacks and corporate earnings – to help fund a surge in federal government spending, the centerpiece of which is the $ 3.5 trillion budget bill proposed by President Biden. Separately, Congress must also act to increase the government’s borrowing limit, a politically charged process that has at times upended markets.
On Monday, those currents combined, reflecting the interdependence of global markets as investors around the world sold off their holdings.
The decline was most ugly in Asia, where Evergrande’s woes – its shares fell 10.2% – caused the shares of other Chinese real estate companies to fall 10% or more. Mainland Chinese markets were closed for the day, but Hong Kong’s Hang Seng index fell 3.3%.
For decades, China’s growth has been driven by investments in infrastructure, including the residential real estate market, which has been funded by huge amounts of borrowed money. Banks often lent to developers on orders from the government, which viewed building construction as a source of jobs and economic growth.
“Beijing says lend, so you lend; when or even if you get your money back is secondary, ”wrote analysts at China Beige Book, an economic research firm.
So many lenders viewed companies like Evergrande as having an implied government guarantee, meaning that if the company couldn’t pay its debts, the government would ensure that the creditors were paid off.
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Now this understanding is tested. The company does not appear to have the cash flow to pay interest owed this week, and credit markets are largely closed to the company. Few people expect him to be able to pay for it on his own, but the Chinese government has so far failed to move conclusively towards a bailout.
The uncertainty around Evergrande is just the latest question investors have faced this year, as the Chinese government has shown signs of straying sharply from the policies that have guided its economy for much of this year. the last decade.
Shares of Chinese tech giants, including Alibaba, have been hammered this year, as Beijing flexed its regulatory muscles on issues such as data privacy. But the implications for China’s changing policies extend beyond its borders.
Restrictions on steel production due to environmental concerns have driven down iron ore prices, which have fallen more than 40% in the past three months. And global crude oil prices – China is the world’s largest oil importer – fell 1.9% on Monday.
The price of copper, used in wiring and a raw material for Chinese property developers, has fallen by more than 3%, weighing on producers around the world. On the US stock markets, industrials closely linked to China also fell. Freeport-McMoRan, a Phoenix-based copper and gold mining giant, was one of the worst performing stocks on the S&P 500, down 5.7%.
Elevator maker Otis, a major supplier of Chinese skyscrapers, fell more than 2%. And construction equipment maker Caterpillar, whose second largest market is China, fell 4.5%.
Looming decisions by Federal Reserve and Congress policymakers are also weighing on stock market sentiment, analysts said.
On Wednesday, the Fed is expected to signal its intention to start reducing its purchases of government bonds, which have injected trillions of dollars into financial markets since the start of the Covid crisis in March 2020.
Substantial deficit spending by the federal government helped boost growth and support corporate profits during the pandemic. But with much of that money spent, investors are now watching closely the $ 3.5 trillion spending plan Democrats are trying to push through Congress.
There are signs that they are less and less certain of the passage of the bill. This month, stock prices of companies whose operations would benefit from another federal spending shock collapsed, such as large engineering and construction firms.
Dycom, which specializes in the construction and engineering of telecommunications network systems, is down nearly 11% since late August. Fluor, another engineering and construction company that has a major public procurement company, is pretty much down. Alternative energy stocks such as Enphase Energy and Bloom Energy also fell.
Investors are also increasingly focusing on when Congress will raise the debt ceiling, a once shallow budgeting exercise that has become increasingly politicized. In 2011, the resentful debate over raising the debt ceiling was accompanied by a market collapse, with officials in Washington appearing to flirt with the idea of not increasing the constraint on borrowing, which would be tantamount to in reality to a default on treasury bills.
“His is going to be dramatic for the good of politics, ”said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management. “People don’t like it.”