China holiday softens Evergrande crisis impact on investors

Highlights

• Japanese Indices have crashed 1.5% after a long weekend.
• Chinese share markets are closed on account of holiday.
• The ASX has recovered by 26 basis points.

Equities in the Asia-Pacific (APAC) region were mixed in Tuesday’s trade as investors continued monitoring the critical situation surrounding embattled developer China Evergrande Group. However, in what brought a sense of relief, the markets for mainland China and South Korea were closed on Tuesday on account of a holiday – which has prevented further investor losses.

Shares in far-east Japan were neck deep in red, as the local markets opened after a prolonged weekend. The benchmark Nikkei 225 dropped 1.79% in afternoon trade while the Topix index tanked 1.51%.

Hong Kong’s Hang Seng index, which crashed by more than 3% yesterday amid investor fears of an impending Evergrande default, extended the losses by 0.66% on Tuesday afternoon. China’s property behemoth Evergrande Group is listed in Hong Kong.

Shares of China Evergrande Group fell 3.95%, while the Hang Seng Properties index climbed 1.59%, bouncing back partially from Monday’s losses. Evergrande shareholders have now lost one-fifth of the value of their holdings in just two trading sessions – as the market cap of the embattled developer has come down by almost US$1 billion.

The company’s chairman, in a bid to assuage fears surrounding the company, tried to reassure markets on Tuesday, stating that the developer will fulfill its responsibilities to property buyers, investors, partners and financial institutions, as per reports in the local media.

In case of a default by Evergrande, the country’s financial system, which has been overgenerous in lending during the go-go years of the economy, is likely to face a systemic risk. The debt of Evergrande is worth US$305 billion – 2.1% of the country’s GDP. The impact, in relative terms, and domestically is going to be at least five times more than what the IL&FS collapse had on Indian financial system – a credit event that caused severe liquidity crunch in India for more than a year.

The global rating agencies are of the belief that the bailout by the Chinese government would take place only in the event of a huge contagion. “We believe Beijing would only be compelled to step in if there is a far-reaching contagion causing multiple major developers to fail and posing systemic risks to the economy,” S&P Global Ratings credit analysts said in a report.

Meanwhile, in Australia, the ASX 200 advanced 0.26%.

Morgan Stanley Capital International’s broadest index of Asia-Pacific shares outside Japan traded 1.01% lower.