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Evergrande turmoil drags down Japan stocks on holiday return

Other Asian markets flat as investors await news on property developer

Tokyo stocks fell sharply in morning trade on Sept. 21, following other major markets lower on China Evergrande turmoil. (Photo by Tetsuya Kitayama)

HONG KONG/TOKYO -- Japanese stocks are the latest to be caught up in the global sell-off sparked by the looming default of property developer China Evergrande Group, with the main Tokyo share index closing down more than 2% on Tuesday.

Other major Asian markets rose slightly after tumbling on Monday, with investors now awaiting signals from Beijing on how it intends to handle Evergrande's debt crisis.

The U.S. Federal Reserve's meeting on Wednesday is also pushing investors to the sidelines, traders said, although they are taking some encouragement from the fact that the S&P 500 pared its losses in the last hour of trading. Markets in China and South Korea are closed for holidays.

"Yesterday's correction was huge and what we are seeing today is a technical rebound," said Hao Hong, head of research at BOCOM International. "The outlook is cloudy, with investors awaiting the Fed and watching what Chinese authorities plan to do to contain the damage from a likely Evergrande default. Still, the Chinese economy is going through a paradigm shift, and this will hurt its short-term prospects."

Hao was referring to the Chinese government and central bank's reluctance to stimulate the economy during times of property stress, as they have done in the past. Instead, authorities are continuing to crackdown on the property sector and other private industries as part of President Xi Jinping's "common prosperity" initiative, which is meant to reduce the widening wealth gap in China.


Hong Kong's Hang Seng Index ended 0.5% higher, while the property subindex rose 3% after tumbling 6.7% on Monday to its lowest level since 2016. China's FTSE A50 Futures traded in Singapore was little changed following a 3% drop on Monday. Japan's blue chip Nikkei Stock Average slid 660 points, or 2.2%, to close below the 30,000 mark for the first time in two weeks.

Japanese companies with operations in China bore the brunt of the decline, with shares in toilet maker Toto down 6%, while Nippon Steel and JFE Holdings were both down around 4%. Hitachi Construction Machinery, which sells many products in China, also saw its stock price tumble over 5%.

Shoji Hirakawa, chief global strategist at Tokai Tokyo Research Institute, said: "Considering that the Beijing Olympics are coming in five months, the Chinese government will not tolerate Evergrande's credit concerns spilling over to the rest of the world." The decline in Japan and U.S. equity markets, he added, "make for a good dip-buying opportunity."

The S&P 500 Futures market was up 0.8%. The benchmark index finished down 1.7% on Monday, its worst day since May.

Evergrande shares slumped a further 0.4% in Hong Kong, taking their losses for the year to 84%. The company, which has $305 billion in liabilities, is fast running out of cash. It 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 labeled a defaulter.

S&P Global Ratings expects Evergrande to default and in a note on Monday said it does not expect the government to step in unless systemic stability is at risk. "A government bailout would undermine the campaign to instill greater financial discipline in the property sector," it said.

Shares in China Minsheng Bank, which is said to have the biggest exposure to Evergrande, rose 3.4% snapping a five-day losing streak that eroded a fifth of its value. Ping An Insurance, meanwhile, rose 2.4% The company said on Friday that 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 that is says are largely financially sound.

"While Evergrande is not a new story in isolation, we've reached a point where the rubber meets the road and there needs to be an adjustment in markets through this process," said Chris Weston, head of research at brokerage Pepperstone in Melbourne. "Taking a step back, the moves in China's property space will almost certainly negatively impact China's growth."

A slowdown in the world's second-largest economy could derail global growth as well. In April, the International Monetary Fund forecast that China would contribute over a fifth of the increase in the world's gross domestic product in the five years to 2026.

Evergrande's travails are also unfolding as the Fed is expected to begin easing back on the stimulus that has underpinned risk-asset valuations.

Morgan Stanley strategist Michael Wilson said Monday U.S. stocks could slump 20% from current levels if the economic slowdown ends up being worse than expected. They advised investors to "hunker down a bit more than normal and skew portfolios toward defensive quality, rather than large-cap growth quality."

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