China’s Evergrande Crisis

Why Did Stock Market Fall on Monday

Introduction:

The Benchmark Index Nifty 50 fell by around 1.04% on Monday 20^th September 2021 and closed at 17.396.90. While the BSE Sensex index fell by around 0.89% and ended up at 58,490.93.

Reason for Fall in the Stock Market:

• Evergrande, China’s biggest Property Developer has been scrambling to raise funds to pay its moneylenders, suppliers, and investors where the regulators warning its $305 billion of liabilities could spark broader risks to the country’s financial system if not stabilized.
• The company holds a debt pile in China and globally. The Debts include Bank Loans, Short-Term Borrowings, and Supplier Credit.
• There is a possible chance that the company may default on the loan of $83 million which was due on Tuesday due to a lack of an outlet for monetization existing inventory and credit freeze for lenders leave the company on short cash.
• This default could be a foreign debt, and hence there can be a great cascading effect.
• In the short term, there could be a great effect on the sector which highly depends on the activity of the Chinese Economy. To be specific, Commodity Sector is going to face some trouble in the shorter time horizon due to this Evergrande Crisis.
• This Evergrande Crisis could have a bigger negative impact on China’s Housing Sector which may lead to a slowdown.
• If so happens, there will surely be an adverse impact on Commodity Sector specifically Steel Sector.
• China which was once a net exporter of Steel has now turned into a net importer of Steel in the recent past or the last 12 months. Hence due to this negative news of Evergrande, had a severe impact on the Steel Stock Prices of Indian Steel Players like Tata Steel, JSW Steel, etc. on Monday 20^th September 2021.
• Another reason being for the fall in the market was global sell-off in equities pulled down Indian benchmark equity indices sharply lower on Monday.

Is this Crisis relatable to Lehman Crisis?

• Many market participants in the market are comparing this crisis with Lehman’s Crisis which took place in 2008, which looks out to be an extrapolation.
• As China is a Communist Economy, the Government will not let things go out of hands which makes a major difference between the Lehman and Evergrande crisis.

Conclusion:

Looking at the impact of this Evergrande Scenario, one should invest in Cyclical Sector Stocks like Steel, Copper, and others only when one is well-versed with the ups and downs of these sectors. In the shorter term, there could be some correction in the market due to this crisis. Also in between, there is greater attention towards Defensive Type Sector Stocks like ITC, HUL, Reliance, etc. Hence one should be watchful towards market behavior and hence should follow a staggered manner of investing.