HONG KONG/NEW YORK -- A wave of fear over Chinese economic growth swept through global markets on Monday as China Evergrande, the country's most indebted property developer, teetered on the brink of default and investors worried about the consequences for its domestic peers and international commodity prices.
While Chinese and Hong Kong property groups bore the brunt of the sell-off, the impact was felt across European and U.S. stock markets. China Evergrande, whose liabilities amount to almost a third of a trillion dollars, is facing deadlines this week for payments to banks and bondholders.
In the U.S., the Dow Jones Industrial Average finished down 614 points, or 1.8% to close its worst day of trading since July. Caterpillar and Goldman Sachs were the benchmark's biggest losers on a day when investors were also watching the outlook for the Federal Reserve's cutbacks to monetary easing. The Dow fell 972 points at its low point before paring its losses toward the end of the session.
The repercussions from Evergrande's prospective collapse will likely contribute to China's ongoing economic deceleration, which in turn anchors global growth and inflation, and casts a pall over commodity prices," said Phoenix Kalen, a strategist at Societe Generale in London.
The Nasdaq closed down 2.2% and the top three decliners were all Chinese companies: Pinduoduo, Baidu, and JD.com. The S&P 500 finished down 1.7%. It was both indexes' worst day of trading since May.
Security personnel seal off Evergrande's offices in Shenzhen. Chinese authorities are keen to prevent the group's troubles from causing wider economic ripples.
© Reuters
The Global X MSCI China Real Estate ETF, an exchange-traded fund focused on the Chinese property sector, closed down 5.4% for the day.
In Europe, London's FTSE 100 slipped almost 1% with miners leading the retreat on concerns a China slowdown will further erode commodity prices. The Euro Stoxx 600 index fell nearly 1.7%.
Iron ore prices fell below $100 a ton for the first time in over a year, as China's imposition of more steel production curbs combined with investor concerns that a real estate construction slowdown will cut demand for the metal. Copper declined 2%, as did oil. American steelmaker Nucor had the second-worst performance on the S&P, closing down 7.6%
On Tuesday morning, Japan's benchmark Nikkei Stock Average followed the trend, falling sharply by about 600 yen, or 2%, from the previous weekend to push it below 30,000 yen. The drop was the largest since late June.
Global economic growth is closely entwined with the fortunes of China, which was the only major economy to expand last year. In April, the International Monetary Fund projected China would contribute over a fifth of the increase in the world's gross domestic product in the five years to 2026.
While the Chinese economy recovered swiftly from the pandemic-induced slowdown, signs have emerged of growth losing steam, particularly in the housing market where activity slumped sharply in July and weakened further in August.
Evergrande shares slumped a further 10.2% Monday in Hong Kong, taking losses for the year to 84%. The Hang Seng Property Index tumbled 6.7% to its lowest level since 2016 and the broader Hang Seng Index ended down 3.3%. Chinese markets are closed till Wednesday for holidays, but the FTSE China A50 index futures traded in Singapore declined over 3%
Evergrande has begun offering suppliers and retail debt investors apartments, parking lots and commercial space in lieu of missed payments. It faces a series of bond coupon payments starting Thursday, and if it does not make the payments within a month it will be termed a defaulter.
"Our baseline remains that any potential default or restructuring of Evergrande would be carefully managed by the government with limited contagion effect in both financial and property markets," said Goldman Sachs economists led by Hui Shan. "This would require a clear message from the government soon to shore up confidence and to stop the spillover effect, the absence of which we think poses notable downside risk to growth in Q4 and next year."
However, the economists warned if a default occurred without clear "ring-fencing" of the spillovers to other parts of the economy, then the outcomes would be harsher, perhaps as much as a 4.1% hit to GDP as housing activity collapses and financial conditions tighten.
S&P Global Ratings also said it did not expect "a large systemic event if Evergrande defaults." But in a note to clients, it said the situation could worsen if a disorderly bankruptcy of the group coincided with a deeper market downturn in the sector. "This would set off a vicious cycle. We believe that the sector itself is already seeing some weakness in sales and pricing since August and could slip further."
Shares in Sinic Holdings, a Shanghai property developer, crashed 87% before trading was halted. Investors fear the company may struggle to refinance a $246 million bond it must repay on Oct. 18, now that investors have soured on the sector. Fitch Ratings last week cut its outlook on the company to negative.
Large Hong Kong developers also felt the negative impact. Sun Hung Kai Properties sank 10%, its largest decline since 2012, and Henderson Land tumbled 13%, with investors also spooked by a Reuters report last week that Beijing has warned the territory's property tycoons it will no longer tolerate "monopoly behavior."
China's biggest insurer Ping An fell as much as 8.4%. The company said on Friday it had no exposure to Evergrande and that its insurance investment fund had equity investments worth 63.1 billion yuan ($9.8 billion) linked to real estate developers, which it said were largely financially sound.
