Monday’s stock market liquidation isn’t just about Evergrande’s story. Part of the problem is the dollar’s gains, boosted in part by the Chinese real estate developer’s financial difficulties.
Dow Jones Industrial Average
were down 2.4%, 2.4% and 2.9%, respectively, on Monday afternoon, in a drop triggered by concern that
Evergrande Group in China (ticker: EGRNF) cannot pay its debts. The company has more than $ 300 billion in liabilities, some of which is owed this week, and only about $ 25 billion in cash, according to FactSet.
This has raised fears that other Chinese real estate developers are also in trouble. But for US markets, the urgent and immediate concern is the rising dollar.
The US dollar index (DXY), which tracks the dollar against a basket of other currencies, edged up to 93.27 on Monday. It rose 1.3%, a huge move in the forex world, since it hit a multi-week low on September 3.
A rising dollar is problematic because it reduces the purchasing power of households, businesses and governments in international trade, since the greenback is the world’s reserve currency. Less purchasing power would mean less demand and less economic growth for a world still struggling with Covid-19.
âIf the dollar strengthens as a result of all of this, you would have a reduction in global liquidity,â said Barry Bannister, chief equity strategist at Stifel. “The immediate shock to Western markets is the currency.”
The recent strength of the dollar is partly due to concerns over Evergrande. If Chinese real estate companies as a whole are indeed over-leveraged – their shares are selling, in part because of concerns about their indebtedness – Chinese banks, which hold some of the debt, could risk not be reimbursed. It would weaken them financially, but no one would know for sure which lenders were hit hard.
Banks in China are said to be reluctant to lend to each other, putting sand in the wheels of the Chinese economy. The People’s Bank of China could lower interest rates or ease monetary policy to stimulate lending.
But lower interest rates could cause the yuan to fall against the dollar, even as the government seeks to smooth fluctuations in the currency through regular market intervention. Currently at 6.48 per dollar, the Chinese currency could weaken to 6.7 shortly, while the dollar index could rise to 96. This, along with the wider concern over events in China, would give hope for a drop in economic demand.
US stocks would continue to sell. The potential side effects of Evergrande problems are key.
Write to Jacob Sonenshine at [email protected]