Evergrande on the brink of collapse: How is it affecting the ASX?

Posted: 21 September 2021 10:28 am
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Australia's Miners are getting battered as concerns grow over a Chinese property collapse.

The Australian market had its worst day in 8 months on Monday amid fears of a Chinese real estate conglomerate collapsing.

The "too big to fail" property developer, is reportedly set to collapse without a government bailout.

As such, iron ore futures dropped by 6.1% to as low as US$95.55. China's real estate sector is the world's biggest buyer of steel, which relies on iron ore.

The fall in prices left Australia's heavily resource-based stock market exposed. Australia was not alone, with the Asian market also facing heavy sell-offs.

Hong-Kong-listed Evergrande itself saw a 15% fall in early trading and triggered selling across the market.

What is the Evergrande?

The Evergrande Group is a large Chinese real estate developer specialising mainly in apartment buildings.

Listed in Hong Kong but based in China, the company employs about 200,000 people directly.

On top of this, the company indirectly attributes to 3.8 million jobs indirectly.

It is the second largest property developer in the country, which has over 1,300 projects in 280 cities.

In fact, such is the size, it even owns the richest football team in China, the Guangzhou Evergrande football club.

However, it has amassed a $425 billion in debt.

It's now struggling to repay the interest owed entering crisis talks on Monday.

A failure to find a solution to its debt troubles could result in a similar story to the Lehman Brother's collapse during the GFC.

It's still unclear if the Chinese government will bail out the company.

What's the impact for Australian businesses?

Australia's resource-heavy market would feel the brunt of any collapse.

Fears over such a collapse led to Australia's ASX200 index having its worst day since 26 February, falling 150 basis points or 2.10%.

Despite sentiment falling for the miners, AMP Capital's chief economist Shane Oliver remained upbeat, reminding investors of the historic high the resources sector is currently seeing.

“The iron ore price has fallen from levels no one ever thought it would get to and is still very high and well in its marginal cost of production – which is around US$14 to US$30 a tonne,” he told Finder.

“It was inevitable.

"It would fall back to earth sooner or later which is why the federal government kept assuming it would fall back to US$55 a tonne into next year.”

Prior to the Evergrande's impending collapse, Australia's mining sector reached record highs.

Since the announcement of Evergrande's impending collapse, shares in Fortescue Metals have fallen by 22% in just 5 trading days.

It's a similar story across BHP and Rio Tinto, which have seen falls of 10.5% and 9.5% respectively.

Impacts for investors

Despite facing a short-term headwind, mining stocks still remain attractive for investors.

As such, Dr Oliver notes its relative price to earnings ratio remains low compared with the market.

“They were already cheap," he says.

Dr Oliver explains to investors they are currently trading on just 8x forward earnings.

"So after 30–40% falls they are now very cheap,” Dr Oliver concludes.

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