The recent events surrounding China Evergrande stocks are, to many, eerily reminiscent of the 2007 American housing crash. When the housing bubble burst and toppled over-leveraged corporations who could not pay back their debts, financial panic spread. With the Chinese government making no move thus far to step in and relieve the debt, all signs point to Evergrande being positioned to fail. The question becomes, how far will Evergrande fall, and where does this land the rest of the world’s markets?
More recently, in the early months of 2021, the market was surrounded by panic when a container ship, the Ever Given, lodged itself in the Suez Canal and brought much of the international trade market to the precipice of panic. The China Evergrande situation still has the potential to remain a small, unsettling moment for markets, but other contributing factors have made September a lackluster month as Covid-19 cases increase due to the delta variant and inflation continues its steady rise. The end of Evergrande could signal unsettling change and slow the second largest economy worldwide.
Positioned to topple or recover at the slightest shift, Evergrande has the world markets watching closely to see where it will land and how its fate will impact the market. Experts are optimistic, but doubt lingers.
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WHAT IS THE EVERGRANDE CONCERN?
The China Evergrande is an industry giant in real estate which has diversified its revenue streams to include wealth management, theme parks, and electric automobiles. With $90 billion in debt and close to $300 billion in liabilities, the company was forced to restructure with its creditors. The ensuing chaos in China is not unexpected as Evergrande is one of the nation’s largest issuers of high-yield bonds.
When the Chinese government chose to reduce the debt burden a company could have, Evergrande’s capital was diminished resulting in suspended construction for failure to pay vendors and contractors. Investors, customers, and business partners are expressing their frustration as tensions run high and money is unavailable.
The Chinese government must determine its next move as Evergrande fails and they watch it fall. The coming weeks and months will determine the resulting turmoil and whether the markets can level set quickly or spiral and unsettle world markets.
GLOBAL STOCKS AND THE EVERGRANDE EFFECT
While inflation rises and hints continue from the Federal Reserve that it will buy fewer bonds in the upcoming weeks, economy indicators are pointing to a strained rest of the year. The risk is debated by the experts, and even the most optimistic are watching closely.
Industry expert and retired Merrill Lynch Wealth Advisor, Richard Hogan is prone to an optimistic outlook but cautions that letting anxiety drive the market can increase volatility. “The world is watching, and market experts have very little concrete information upon which to make solid predictions,” Hogan says. “The markets have been startled by the uncertainty of it all, and that in itself can lead to problems.”
As Congress debates the newest social programs bill and rages over raising the debt limit to avoid default, there is no hint of bipartisanship. The Fed distancing itself slowly from pandemic relief practices is signified by tapering bond sales. Uncertainty is the only certain factor at this juncture as American markets answer current domestic factors and watch for the Evergrande’s effect abroad.
HOW TO ANSWER THE EVERGRANDE PROBLEM
The urge to sell stock in the current climate is understandable but not necessarily the only or best path to solidifying a volatile climate. Market corrections are often the motivator to re-engage the populace in trading. In a year where a consistent rise in stocks has dominated, the sudden stall in growth has the added pain of coming after the good times. Fading and down markets are to be expected, but this year’s boom makes the sudden turmoil particularly painful for investors.
Long-haul investors will generally benefit from a comprehensive understanding of the news and a less reactionary approach to each given crisis. As the world waits to see if Evergrande will fall, watching market trends and understanding the ebbs and flows of an active market is the best bet for investing well in times of crisis and change.