What’s happening: Evergrande, one of China’s biggest property developers, is in serious trouble. It warned this week that if it doesn’t raise funds quickly, it could default on its substantial loans, listing $300 billion in total liabilities. If this happens, its impact will be felt on the banking system of the country. The group has also suspended work on some projects as it tries to conserve cash, a move that is set to hit China’s property sector.
Evergrande’s bonds are also under pressure, as is its electric vehicle business, which Bloomberg recently identified as the worst-performing stock in the world.
A Step Back: Debt in China’s property sector has been a risky threat to the country’s financial system for some time. And Evergrande is one of China’s most indebted developers. It has a debt of $37 billion within a year.
Should Evergrande really default, it would be another destabilizing blow to the markets and the economy at an already vulnerable moment.
Although not guaranteed, Beijing will likely intervene to soften the blow, Julian Evans-Pritchard, senior China economist at Capital Economics, said in a note to clients in July.
“Given the desire to punish reckless behavior by private entrepreneurs and to discourage speculative property investment, China’s leadership is reluctant to bail out Evergrande,” he wrote. “But given the sheer size and systemic role of the firm, the authorities will take steps to ensure a systematic restructuring in the event of default.”
That said: a default would potentially lead to dire financing conditions for the entire real estate sector, hurting their businesses.
“Even if other developers escape a similar fate, construction activity is likely to suffer as they are forced to scale back new projects,” Evans-Pritchard said.
A major lapse is the last thing China needs right now.
OPEC and partners meet as oil trade nears multi-year high
Brent crude futures, the global benchmark for oil prices, are trading near their highest level in more than two years.
It gives some cover to the Organization of the Petroleum Exporting Countries and its allies as representatives meet by videoconference on Wednesday.
Latest: OPEC+ is expected to confirm its plan – announced in July – to gradually boost oil production.
“It appears that the timetable for a monthly production increase of 400,000 barrels per day in mid-July will be confirmed,” Commerzbank analysts said in a note to clients.
It helps that the group’s market experts are forecasting a supply deficit of 900,000 barrels per day for the rest of the year due to resurgent demand as the economy recovers.
One caveat: If OPEC+ continues to increase production as planned, the committee expects more than 1.6 million barrels per day next year. This may impact prices in the medium term. But for now, that’s a problem for another day.
“The main focus today will be on production volumes in the coming month,” Commerzbank said.
AOC wants Jerome Powell fired
Wall Street is rewarding Federal Reserve Chairman Jerome Powell’s cautionary speech at last week’s Jackson Hole symposium, when he indicated the Fed would soon begin to wind down its emergency economic stimulus program.
“We urge President Biden to re-imagine the Federal Reserve focused on eliminating climate risk and advancing racial and economic justice,” lawmakers said in a statement Tuesday.
Background: Powell, a Republican and former investment banker, was nominated in 2017 by former President Donald Trump to head the powerful Federal Reserve, which later turned sour over his selection. Powell’s term ends in February, and the White House has not said whether he will be reappointed.
Under Powell, the Fed wasted little time in March 2020 in responding forcefully to the economic fallout from the pandemic. Economists credit the Fed’s historic actions with helping prevent a full-blown depression and financial crisis in the United States. In a delicate time of economic recovery, Biden may choose to prioritize consistency.
But the campaigns of AOC and Michigan colleagues Rashida Tlaib, Ayana Pressley of Massachusetts, Mondaire Jones of New York and Chuy Garcia of Illinois widened the conversation about the Fed’s role in the economy and in society.
- ADP private employment report for August positions at 8:15 a.m. ET.
- The latest ISM Manufacturing Index follows 10 a.m. ET.
– Laura He contributed reporting.