European stocks steady after steepest global slide in months

Evergrande Real Estate Group Ltd updates

European markets rose on Tuesday after the heaviest sell-off in months for global stocks as investors braced themselves for the possibility of a default by Chinese property developer Evergrande.

The region-wide Stoxx 600 benchmark opened up 0.6 per cent, while London’s FTSE 100 index rose 0.7 per cent. Hong Kong’s Hang Seng also regained its poise, trading down just 0.1 per cent after dropping more than 3 per cent in the previous session.

The moves come after the MSCI World index of developed market equities closed down 1.6 per cent on Monday in the biggest fall since May.

Still, Evergrande, the world’s most indebted property developer, fell as much as 7 per cent, after closing more than 10 per cent lower on Monday. The company’s share price has dropped about 85 per cent this year. Its bonds have also tumbled in price to highly distressed levels.

The turmoil at Evergrande has shaken markets this week, as global investors grappled with the prospect that Beijing could allow the leverage-fuelled group to default. Such a move would upend long-held expectations that Chinese authorities would intervene to protect systemically important but financially distressed companies.

Monday’s sell-off hit shares in Europe and drove down all but 50 stocks on the S&P 500, which finished the day 1.7 per cent lower. The Nasdaq Golden Dragon index of large US-listed Chinese companies closed down 5.4 per cent.

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Japan’s benchmark Topix slipped 1.7 per cent on Tuesday after a public holiday on Monday — its biggest one-day fall in three months.

Pressure on property developers that were responsible for much of China’s economic growth — along with most of Asia’s high-yield dollar debt issuance — has also mounted ahead of a crucial deadline for Evergrande on Thursday, when it faces an $83.5m interest payment on one of its bonds.

Line chart of Share price (HK$) showing Evergrande shares have fallen more than 10% this week on default fears

The Securities Times, a financial newspaper controlled by Chinese Communist party mouthpiece People’s Daily, reported on Tuesday that Evergrande chair Hui Ka Yan had written in a letter to employees that he was confident the company “will step out of its darkest period as quickly as possible”.

But analysts said Chinese authorities were unlikely to provide the teetering developer with direct support, despite growing anticipation of a default this week.

“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,” analysts at S&P said in a recent note. “Evergrande failing alone would unlikely result in such a scenario.”

Judy Zhang, an analyst at Citi, warned that while Beijing would probably be able to mitigate the spillover from the developer’s debt crisis, more than 40 per cent of Chinese banks’ assets were related to the property sector.

“We do not see the Evergrande crisis as China’s ‘Lehman moment’ given policymakers will likely uphold the bottom line of preventing systematic risk to buy time for resolving the debt risk,” Zhang said, referring to the market turmoil that followed the collapse of Lehman Brothers in 2008.

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But she added that credit risk from exposure to debt-laden Chinese developers was the highest for lenders including Minsheng Bank, Everbright Bank and Ping An Bank, a subsidiary of insurance group Ping An, whose 3 per cent fall on Tuesday left its shares down almost 9 per cent this week.

Hong Kong-listed Minsheng and Everbright are both down more than 5 per cent this week.

Markets in China remained closed for a national holiday on Tuesday.

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