Daily Commentary BY THE CURVE TEAM –

Daily Insights – Evergrande Opportunities

21st of September, 2021

China Evergrande Spooks Markets

  • A Chinese property developer, China Evergrande, is at risk of defaulting this week.
  • Their total debt is $300 billion (US Dollar), which is the equivalent of 2% of China’s GDP.
  • Share markets were down overnight as a result and the volatility index was up over 20%.
  • Should Evergrande default on its debt, the most obvious ramifications will be to iron ore and general Chinese demand.

Opportunities From Evergrande

  • In yesterday’s weekly piece, we talked about market events creating opportunities.
  • China Evergrande could be a similar scenario, where spreads blowout, say for Chinese bonds and/or NCDs as markets fear the knock-on effects of a default.
  • The increase in yield could be disproportionate to the risks posed from an Evergrande default.
  • Already Evergrande is being likened to Lehmann Brothers during the GFC simply because their business is a similar size. The fact that they are less interconnected to the financial system is being downplayed.
  • Markets are prone to overreacting, whether from fear or greed.
  • If markets regain confidence as they did with Credit Suisse and Macquarie (see yesterday’s weekly commentary), spreads would decline again and the higher yields would disappear.

Josh Stewart

Associate - Money Markets