Will China’s Evergrande Crisis Drag the Indian Stock Market?

On Monday this week, Hong Kong equities witnessed a major sell-off during the Asia trading session. Hang Seng, the benchmark index, plummeted 4% mainly because China’s real estate giant Evergrande Group is on the verge of defaulting. They are a Fortune 500 company having over $300 bn in liabilities that became due for payment starting this week. Listed in Hong Kong, Evergrande itself has tumbled 16.4% this week and 84.5% in the year so far.

US stocks also entered the week deep in red. S&P 500 fell 1.7% and Dow 600 points. The tech-heavy Nasdaq Composite also dropped 2.2%. A similar scene played out in the Japanese market, where indices Topix and Nikkei 225 shed over 1.5% each. Back home, Dalal Street tumbled, dragging domestic steel stocks along.

Travelling back in time — Lehman Brothers

Back in 2008, America had witnessed a similar crisis with realty giant Lehman Brothers declaring bankruptcy. Forgetting the resultant global financial crisis of 2008 is hard, right? Is a similar situation around the corner? Well, analysts expect not. Some say that 2008 was a long, long time and also that a lot has changed since then. And so both the situations don’t run parallelly. But this doesn’t negate the possibility of a spillover of the contagion.

Chinese regulatory crackdown in its Edtech sectors

Earlier this year, the Chinese tech and education sectors were tied down with regulatory restrictions, whose impact reverberated across the globe. Companies such as Didi, Tencent, and Alibaba faced regulatory challenges due to reasons including data privacy concerns of users and prohibition of EdTech companies from raising money in overseas markets.

Global investment in Chinese stocks and bonds shot 40% to over $800 bn through the last year. Around the time of the Chinese Edtech crackdown, the country’s weightage in FTSE emerging markets ETF was 40%. And although Shanghai Composite, a broader index, was down 2%, Tech and Education related stocks plunged ~90%.

How did this impact Indian markets?

Although of Chinese origin, these technology companies’ top investors are Western and not domestic. For instance, Naspers Limited, a South African MNC and the Vanguard Group, Inc., a US company, are top international investors in Tencent. And Goldman Sachs International is one of the major investors in Alibaba. These investors have also poured their funds into Indian equity markets.

A defence mechanism

The natural instinct of such investors incurring significant losses in any country, be it China or others, would be to limit their risk exposure in other countries.

On the contrary

India and the US, saw a generous inflow of funds as the big investors redirected their funds from China to emerging markets. However, experts say that this is a situational advantage for India as it wouldn’t last in the long run.

Coming back to the Evergrande crisis

The real estate sector accounts for close to 29% of the Chinese economy. Evergrande Group is the second-largest property developer in China. Failure to repay the liabilities could cause repercussions for both China and the global markets. A default could either call the Chinese government to rescue Evergrande or would need liquidation of the company’s assets. The latter could have a ripple effect impacting both banking and non-banking institutions having exposure in Evergrande.

Continue to read whether the Chinese government will step in to contain the spillover and also if the Indian markets would be in trouble.