International Communique No. 307 – 22nd September 2021


The mood was not great to start with. September is historically unfavourable for equities, which has been trading on red-hot multiples. Then, an unexpected risk from far away has knocked financial markets off balance – from Asia, to Europe, to the US. The worst decline in equity indices for three months was seen on the 20th of September, with the 10-year Treasury yield falling to 1.32%.

This volatility may be attributed to the possible bankruptcy of the colossal Evergrande, one of China’s leading property developers. With more than USD 300bn in debt, the company – which has long been in trouble – announced that it would default on USD 83.5bn in coupon payments tied to its bonds. The fear of a property bubble bursting, in a sector that accounts for almost 28% of the Chinese economy, is a concern. There are those who are wondering whether China may now have its answer to Lehman Brothers.

The crux of the matter is whether the authorities will step in to provide a safety net and limit a liquidity crunch with the potential to contaminate other Chinese and even Hong Kong property companies. Conversely, the market is highly fragmented – Evergrande’s share estimated at 4% – which reduces the risk of significant pressure building on property prices. The sharp fall in banking majors’ stock prices was probably an overreaction, since loans to Evergrande were mainly granted by state-controlled Chinese banks.

In actuality, this latest event merely highlights the regulatory crackdown that China has been engaging in for many months. This has affected most business sectors, starting with those spanned by the giant Alibaba Group Holding. The restrictions have also extended into heavy industry, as reflected in the fall in commodity prices. A slowdown in GDP growth could be in store.

The recent loss of investor confidence is certainly not due only to mishaps in China. That news came at the wrong time as investors prep themselves for announcements of monetary tightening by the Fed, and wondering when the Fed will taper its asset purchases whilst also on the lookout for signs of a potential rate hike in 2022. In contrast, the August inflation report (+4%) has rekindled hopes that price increases are transitory and the inflation will ebb into a range of 2.0-2.5% once the dust settles. A final issue stoking anxiety has been the confrontation in Congress between Republicans and Democrats over the debt ceiling, and the spread of the delta variant as the US recorded its highest number of daily deaths (2,000) since March.

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