Massive sale of Chinese real estate stocks caused global market decline: NPR

Stock markets collapsed amid concerns over the instability of China’s financial system, creating uncertainty in one of the world’s major economies.



ARI SHAPIRO, HTE:

There has been a massive sell-off in markets around the world today. The Dow Jones lost 614 points, or about 1.8%, its worst day in more than two months. He recouped some of those losses at the end of the trading day. The big dip was started by a Chinese real estate company that many Americans have never heard of. David Gura from NPR joins us in explaining.

Hi David.

DAVID GURA, BYLINE: Hey, Ari.

A SHAPIRO: First, tell us what happened today.

GURA: So that’s the world we live in. I mean, a business can affect markets all over the world. There was this massive sell-off of Chinese real estate stocks and one company in particular. The Evergrande Group is a real estate developer. It is a massive conglomerate based in the city of Shenzhen. And it’s one of the biggest companies in the world, with $ 300 billion in debt. This is what it owes to its creditors. Now sales have gone down and Evergrande has tried to cut costs and offload buildings. But none of that worked, and the company told investors it might not be able to pay its bills. This is how the trading day began and resulted in losses in Europe and the United States.

A SHAPIRO: You say we now live in this world where the well-being of a business can affect global markets. Explain why investors in London or New York would care about this real estate company in China.

GURA: Yeah. Wall Street was already on the alert, concerned about the spread of the delta variant and the effect it might have on the economic recovery. Markets have been lagging in September so far. But when a company of this size faces a credit crunch, investors around the world get nervous because companies anywhere can hold some of that debt. Today, Jill Carey Hall is a senior equity strategist at Bank of America, and she says it’s something she will be watching.

JILL CAREY HALL: The good news for the S&P 500 is that there isn’t as high a proportion of direct exposure to the region as some other regions of the world.

GURA: But a couple of other things are at stake here, Ari. One of them is how it affects the feeling. It was already very low, again, because of COVID-19. It also makes them nervous when they see something like this happening – a company of this size in that situation and then that kind of massive sale. And # 2 is that big unknown – what, if anything, the Chinese government is going to do about Evergrande. And will this affect the Chinese financial system? The Chinese government is cracking down on real estate developers, and it’s unclear whether it will step in to prevent Evergrande from collapsing.

A SHAPIRO: There is another factor here in the United States, which is potential default. Tell us about the impact this could have.

GURA: Yes. There is one in the United States as well – potential in the United States as well. Wall Street is watching what is happening in Washington as the United States is once again faced with what is called the debt limit or the debt ceiling. Congress places a limit on the amount the government has available to pay its existing debts.

Now lawmakers have raised the cap dozens and dozens of times, but there’s little more the Secretary of the Treasury can do if lawmakers don’t raise it again. Janet Yellen wrote to Congress. She urged them to increase this limit. She has an op-ed in the Wall Street Journal describing what could happen if lawmakers don’t act. And Yellen isn’t saying the world is going to end, but she’s getting close enough. She writes (as she reads) that it would likely precipitate a historic financial crisis and default that could trigger a spike in interest rates, a sharp drop in stock prices and other financial turmoil.

A SHAPIRO: What does this probably mean for the days to come?

GURA: Yes, it’s a busy week. On Tuesday, the Federal Reserve kicks off a two-day meeting. The Fed chairman and his colleagues are expected to start discussing how to reduce some of the financial support that has supported markets since the pandemic began more than a year ago. The Fed bought tens of millions of dollars in bonds and mortgage-backed securities month after month, and now it’s ready to start cutting that amount. Investors will listen carefully to what Fed Chairman Jerome Powell has to say about the state of the economic recovery. We’ll see if his comments have already changed in light of new data. And, you know, something Powell has said since the start of this crisis is that the path to economic recovery is determined by COVID-19, with the virus continuing to be of great concern to economists and investors alike. especially as the spread of the delta variant continues.

TO SHAPIRO: David Gura from NPR, thank you very much.

GURA: Thanks, Ari.

(EXTRACT FROM THE SONG ARCADE FIRE, “CREATURE COMFORT”)

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