A Chinese Real Estate Company Is Walloping Your Stocks. Here's Why

Sep 20, 2021
Originally published on September 21, 2021 7:16 am

Updated September 20, 2021 at 5:56 PM ET

Stock markets from Hong Kong to New York were hit by a major sell-off on Monday as a massive Chinese real estate conglomerate called China Evergrande Group faces a potentially devastating debt default.

The Dow Jones Industrial Average slumped 614 points, its worst performance in about two months, after earlier falling more than 900 points. The S&P 500 and Nasdaq also fell sharply, posting their worst daily percentage falls since mid-May.

The Evergrande Group owes roughly $300 billion, and investors fear a default could destabilize the financial system in China, one of the world's top economies.

The worries about Evergrande come at a delicate time for Wall Street, which has gone from a record-setting run earlier this year to hefty falls this month.

Investors are facing a growing list of worries, from the Delta variant to a potential debt default by the U.S. government here at home.

Here are three things to know about the stock market:

So what's going on with Evergrande?

Evergrande is one of China's biggest property developers, and it's in big trouble.

In a stock filing this month, Evergrande said flat-out that "there is no guarantee that the Group will be able to meet its financial obligations."

So far, Evergrande's efforts to offload office buildings and attract new investors haven't helped, and the company has hired a team of outside advisers.

But a big question is how the Chinese government will intervene, if at all. China has been growing increasingly concerned about debt levels in the country, especially in its overheated property sector.

A default would raise concerns about the stability of China's financial system, and some investors worry about contagion — when fear tied to a major event spreads.

The China Evergrande Group headquarters in Shenzhen in southeastern China. A default would raise concerns about the stability of China's financial system.
Noel Celis / AFP via Getty Images

Weren't things already rough on Wall Street?

Yes, they were. The Dow Jones has declined in each of the three previous weeks, a rarity in a year marked by a string of record highs.

September is traditionally a tough month for markets. This year, there are several factors weighing down on stocks.

The Delta variant is a top concern as it continues to spread across the country, threatening the economic recovery. Already airlines are saying they are seeing more cancellations and fewer bookings.

The uncertainty raises the stakes for the Federal Reserve, which meets on Tuesday and Wednesday.

Fed Chairman Jerome Powell has said the central bank plans to start removing some of the massive market support it's currently providing to markets, a process known as the bond taper. That support has come in the form of purchases of $120 billion in government bonds and mortgage-backed securities each month.

And there are also worries about a debt default by the U.S. government.

Treasury Secretary Janet Yellen has said the U.S. could run out of money to pay its bills in October if Congress does not raise the debt ceiling, something that is far from certain at a time when Democrats have only a razor-thin majority.

In an op-ed in The Wall Street Journal, Yellen warned a debt default would lead to a "widespread economic catastrophe."

Treasury Secretary Janet Yellen testifies before a Senate Appropriations subcommittee on Capitol Hill in June. Yellen is warning of a potential "economic catastrophe" if Congress does not raise the debt ceiling.
Greg Nash / Pool via AP

So what happens next?

Halfway through September, all three major indexes have declined.

Trading on Wall Street is likely to remain volatile as investors proceed with caution. They'll pay close attention to the Fed's plans, and they'll watch what is happening in China. And economic data will continue to be important.

Perhaps the most important factor will be what happens with the Delta variant, which has led many companies to push back return-to-work dates.

Wall Street forecasters are already paring back their expectations for gains this year, and many are predicting a short-term pullback.

That said, markets have suffered bouts of uncertainty since the pandemic began, and they've eventually regained their footing to continue a march toward new record highs.

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RACHEL MARTIN, HOST:

All right. So a Chinese real estate company you've probably never heard of is behind one of the worst days on Wall Street in months. The S&P 500 fell by 1.7% percent. It's the worst fall since mid-May. So what's happening in China, and why is Wall Street nervous? NPR's David Gura has more.

DAVID GURA, BYLINE: The company is called the Evergrande Group, based in the city of Shenzhen. And on Monday, its problems led to a big sell-off around the world, from London to New York. Evergrande is in deep financial trouble. It owes creditors roughly $300 billion, and the real estate company is struggling to meet its financial obligations. In other words, Evergrande could default on its debt. The company has hired new financial advisers, and it's tried to cut costs and offload office buildings. But that has not made a dent in the company's debt load. That's worried investors in Hong Kong and globally. The effect of a default could spread beyond China's borders. It could set off fears by creating concerns about the stability of China's financial system, one of the largest in the world.

Jose Rasco is the chief investment strategist at HSBC Private Bank Americas.

JOSE RASCO: There is concern about some of the property developers. And is this a one-off, or is this a systemic risk problem? We don't believe it is. We believe it's a one-off, and we think the Chinese government will support the system, provide the liquidity necessary.

GURA: The troubles with Evergrande come as Washington faces the prospect of a default of its own. Congress has yet to raise what's called the debt ceiling, which sets a limit on how much the government is allowed to borrow. Treasury Secretary Janet Yellen says the government could hit that ceiling in October. And in an op-ed for The Wall Street Journal, she warns it would be disastrous if the U.S. were to default for the first time in its history. It's been a tough month for stocks already. Worry about the delta variant has hit markets hard.

A two-day Federal Reserve meeting gets underway on Tuesday, and Fed Chairman Jerome Powell has said repeatedly the virus determines the path of the economic recovery. It's expected the Fed will focus on how to reduce some of the support it's provided to markets during the pandemic. It's been buying $120 billion worth of bonds and mortgage-backed securities every month. Fed Chair Powell and many of his colleagues at the Central Bank have said it's time to consider how to reduce those purchases, something the Fed will do deliberately and delicately so it doesn't catch Wall Street by surprise. The Fed will also share its latest views on the health of the economy as prices have continued to climb.

David Gura, NPR News, New York.

(SOUNDBITE OF PHAELEH'S "JOURNEY") Transcript provided by NPR, Copyright NPR.