Can Evergrande’s great fall in China impact Canadian stock markets?

Highlights

  • China Evergrande Group’s stocks on the Hong Stock Exchange (HKEX) plunged by more than 10 per cent on Monday.
  • The Chinese real estate giant is currently facing much heat due to its massive levels of debt.
  • As the rising concerns surrounding China Evergrande’s debt crisis troubled stock markets in China, Canadian and US stock futures also began the week in red. 

Stock markets around the world felt tremors as Chinese real estate giant Evergrande Group nosedived on Monday, September 20.

As China Evergrande Group’s stocks on the Hong Stock Exchange (HKEX) plunged by more than 10 per cent on Monday, the market’s benchmark Hang Seng Index dipped by over three per cent, noting its biggest decline since July this year.

Let’s take a closer look at why this property developer is crisis and how that can impact global, including Canada’s stock markets.

 

Why Evergrande Group is in trouble?

Founded in 1996, Evergrande is primarily known for its business of developing residential real estate. It is said to have constructed some 1,300 housing projects across in 280 cities in China, and plans to build another 3,000 properties in the country.

Over the years, the Shenzhen-based company expanded its operations to reach into new ventures such as electric vehicles (EV), theme parks, streaming service, and even football club of Guangzhou FC.

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But with its expanding business model came a lot of debt, and that seems to have brought the enterprise to a verge of collapse.

In its attempt to buy more land to start newer projects, Evergrande had reportedly begun borrowing huge sums of money. While the company was selling off some of these newly built properties, its debt continued to mount.

Also read: Canada housing market: Can it be heading for a crash in 2021?

Then, in late 2020, Chinese authorities began closely scrutinizing its business amid its crackdown on property firms. And that’s when Evergrande’s massive debt loads came to light.

In late 2020, Chinese authorities began closely scrutinizing its business, drawing light to Evergrande’s massive debt loads.

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Soon, Evergrande began losing its trust factor among lenders and buyers, bringing it closer to its collapse.

As of now, Evergrande is said to have piled up a debt of about two trillion yuan, (approximately US$ 300 billion).

Evergrande’s fall and global stock markets

As the rising concerns surrounding China Evergrande’s debt crisis troubled stock markets in China, Canadian and US stock futures also began the week in red.

The Toronto Stock Market (TSX) futures sank to a two-month low on Monday, down 1.5 per cent at 6:44AM EST. In the US, NASDAQ and S&P 500 futures were down by 1.07 per cent and 1.32 per cent, with Dow Jones futures slipping around 1.58 per cent.

Also read: Are real estate stocks a good investment in Canada?

While national factors like the federal elections in Canada and the anticipation ahead of the Federal Reserve’s September meeting in the US influenced these numbers, Evergrande’s crisis is likely to have impacted them too.

Europe, too, felt its heat as the Stoxx 600 index sank by around two per cent in the afternoon trade, with European banking stocks notably collapsing. The German Dax, on the other hand, tanked by nearly three per cent around 3PM in the afternoon.

International companies such as London-based Ashmore Group Plc, New York’s BlackRock Inc and UBS Group AG in Zurich were reportedly major holders in Evergrande, and could likely feel an impact amid this crisis.

Can Evergrande’s troubles impact Canada and its stock markets?

Evergrande is known to hold assets in North America, including the Fairmont Le Château Montebello resort in west Quebec that it purchased in 2014. Hence, there may be some effects in that area.

But in terms of stock market performance, while Canada can feel some heat along with the rest of the world, some market experts believe that a direct impact of the Evergrande crisis may not take place.

Bottom line

An important factor to note is that Evergrande’s fall from grace comes amid a real estate boom in China, one that has lasted for years. As the country grew from a primarily agrarian-based economy to a major urban centre over the past few decades, real estate became a hot bed or investment.

This quickly gave rise to a “housing bubble”, which was more of a tide that property giants like Evergrande surfed for a long time. But in the bid to pop up more properties to sell, it appears to have dug itself a big old trench of debt and trouble.

While the scenario may be different, Evergrande’s journey can serve as a cautionary tale to real estate players all around the world.

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