China Evergrande Changes the Game on Wall Street

Debt-ridden China Evergrande’s (EGRNF) woes are changing the game on Wall Street this week from “buy the dips” to “sell the peaks,” which usually marks the begging of a bear market.

Last week, the Chinese real estate giant warned that it is the target of a hostile media campaign, which could undermine its sales in September, prompting a big sell-off in its shares and bonds maturing in 2024.

Unfortunately, things became worse by Friday as the sell-off spread into the shares of other Chinese real estate and property companies. (See EGRNF stock charts on TipRanks)

Then, there was a Globaltimes editorial over the weekend saying that Evergrande’s prospects for easing its liquidity crisis remain gloomy. “China Evergrande Group’s repayment plan for its wealth management products through properties has started, but the debt-ridden property giant’s prospects of weathering the current liquidity crisis remains gloomy, according to industry observers,” said the editorial.

The editorial went on to explain the roots of Evergrande’s problem. “Evergrande’s liquidity problem is believed to have stemmed from the previous credit bubble, which led to the developer’s aggressive expansion into multiple numbers of sectors. Yet, after the regulators tightened the rules and supervision over the financing channels to rein in irregularities, its capital chain has become strained with liquidity.”

Nonetheless, the editorial provided no hints as to whether the Chinese government has any plans to inject liquidity to save the ailing real estate company. That raised the prospect of contagion should Evergrande fail to meet its short-term debt obligations.

To those who have been around Wall Street long enough, that sounds like China’s Lehman moment. Thus, the rolling of sell-offs in Chinese property shares into Monday’s trading, and the spreading of that sell-off into every risky asset around the globe, including Wall Street.

Adding to the negative sentiment stemming from Evergrande is the deterioration of relations between China and the U.S. over growing tensions in the South China Sea.

There’s also the upcoming FOMC meeting on Wednesday, adding to Wall Street anxiety. Fed watchers expect the nation’s central bank to begin tapering off the purchases of U.S. Treasuries and mortgage-backed securities, adding pressure on high-risk assets. Financial and material shares were particularly hit on Wall Street, as were companies with large debts.

Still, there was a bright side to the market sell-off. U.S. Treasury bonds rallied, as investors usually see this class asset as a haven in periods of global turmoil. That’s a significant change from the previous days, when U.S. Treasury bonds were selling off in response to strong inflation numbers.

Disclosure: At the time of publication, Panos Moudoukoutas did not have a position in any of the securities mentioned in this article.

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