One of China’s biggest real estate developers is in dire financial straits, and the world is watching. What does this mean for the US real estate market, real estate agents, and the economy?
Struggling to sell property and loaded with debt, one of China’s largest real estate developers has caught the attention of investors around the world.
As Evergrande draws closer to the financial crisis, here’s what realtors need to know about the situation and its potential impact on the US real estate market.
What is the Evergrande crisis?
Evergrande is one of the largest real estate developers in China. The company is heavily in debt and may soon be unable to pay the interest.
Earlier this month, Evergrande admitted he was struggling to sell property fast enough to make payments on $ 300 billion in bonds. The situation also strained the company’s cash flow.
The Chinese government has been reluctant to say what action, if any, it will take to remedy the situation and has signaled that a full bailout is unlikely, according to reports from The New York Times and elsewhere.
But there are steps China could take to avoid the worst-case scenario and protect the company’s struggles from repercussions throughout the global economy.
Will this have an impact on American investors?
To some extent, he already has. Investors followed these events and adjusted their expectations accordingly.
US stocks followed their Asian and European counterparts earlier this week, diving into news of Evergrande’s worrying financial situation. The S&P 500, an index of America’s largest publicly traded companies, fell 2.9% on Monday afternoon before recovering a bit, closing 1.7% on the day. It was one of the worst trading days the index has seen in months.
In recent days, however, US stocks have risen again, erasing most of their losses from the start of the week. The S&P was still trading down 2.1% from the all-time high it recorded earlier this month.
It was already likely to be a volatile week for stocks. Federal Reserve Chairman Jerome Powell held a press conference on Wednesday preparing investors for something they have long been waiting for: The central bank would soon begin to cut its large budget support to the U.S. economy. The reduction could start as early as the next Fed meeting in November, he said.
Will this have an impact on the US real estate market?
Evergrande is not developing properties in the United States, but the potential ripple effects of its struggles could be felt by US real estate companies and the US economy as a whole.
Supply chains for construction materials and equipment, already stretched to their limits by strong demand for new housing, could be further disrupted.
US companies doing business in China may bear more risk. Caterpillar Inc., a giant construction equipment maker, saw its stock price drop 4.5% on Monday, the biggest loss of any company listed on the Dow Jones Industrial Average.
Caterpillar does not report its operations in China, but about a quarter of its sales are in the Asia-Pacific region, according to a report at Barron.
Beyond the impact on providers serving the US and Chinese real estate markets, the outcome of Evergrande’s situation is expected to have broad implications for the global economy.
If the Chinese government steps in to stabilize the situation, little could change in the global economy. But if China lets one of its biggest local businesses fail, Bloomberg reports there is some concern that it could strain the global financial system and make credit more scarce. The dynamic, some say, could be similar to what happened when US investment bank Lehman Brothers went bankrupt in 2008 and deepened the ongoing financial crisis at the time.
A global economic slowdown could also affect the trajectory of mortgage rates. In general, rates increase when economic conditions improve. But US fiscal policy also has a say in financial markets.
What happens next?
All eyes are on the Chinese government.
Despite the uncertainty, financial markets appear to be hopeful that China will find a way to avoid the worst outcome.
China’s central bank has already taken steps to signal support for the economy. According to Reuters, the People’s Bank of China has strengthened the banking system this week to the tune of $ 13.9 billion. This step seems to have reassured investors for the moment, reports the press service.
The company has also made efforts to reach an agreement with domestic bondholders to avoid default. Evergrande has reached an agreement to settle the interest payments on such a bond, although the terms are not disclosed.
Email Daniel Houston