Although not clear of danger, investors are showing an increased tolerance for risk, analysts said, and appear confident that Democrats will pass legislation to avert a government shutdown, though Republicans are attempting to block the measure and force the federal government to default.
On Wednesday, Federal Reserve Chair Jerome H. Powell said the central bank will leave economic supports in place for the time being as the country continues to rebound from the coronavirus pandemic and the spread of the deadly delta variant. That powered up the markets, which turned positive for the week on Thursday.
“There are host of risks out there. Evergrande is well down the list,” said Greg McBride, chief financial analyst at Bankrate.com. “But as an investor, you have to look long term. You have to look beyond the short-term risks. If you’re looking for clear skies and no traffic to be able to invest, you’re never going to.”
“The U.S. market has shrugged this off,” said Chris Detmer, managing director of Washington Wealth Group of Steward Partners. “It’s noted it, reacted to it, but now has shrugged it off.”
Earlier this week, Evergrande’s march toward default triggered wild trading. But those concerns were eased Wednesday after the conglomerate announced a deal with domestic creditors to “resolve” a $35.8 million interest payment for a Shenzhen-traded yuan bond. But it remains unclear whether it made good on an $83.5 million-dollar-backed payment due Thursday. Even then, though, it has 30 days to settle the issue before entering into default.
Evergrande’s aggressive model of debt-fueled expansion has saddled it with $300 billion in debt, or roughly equivalent to 2 percent of China’s gross domestic product. After a downturn in the Chinese property market, combined with strict government rules that curbed lending to highly leveraged developers, the group is caught in a potentially lethal liquidity crisis.
On Thursday morning, Chinese state media outlets reported that Xu Jiayin, Evergrande’s founder, led meetings of company managers late into the night Wednesday as he tried to restart construction on apartment complexes in dozens of cities across China.
But some lenders were still not optimistic. Reuters reported that certain bondholders had given up hope on receiving their interest payments Thursday, and instead were awaiting word from Evergrande on its path forward within the next month.
Analysts said the company and regulators’ actions point to Beijing taking care of domestic consumers and yuan-backed debt before making foreign investors whole. That approach, McBride said, could placate Chinese lenders and smooth out discomfort in Asian credit markets. But fears of contagion persist, he said, mostly because of myriad unknown vulnerabilities if regulators allow Evergrande to fail.
“It’s one of those things where I don’t have to outrun the alligator, I just have to outrun you,” he said. “It’s what’s deemed to be the weakest link where markets could really seize up. Credit is like oxygen to a fire. If the flow of credit is interrupted, economies and markets seize up very quickly.”
The small signs of progress boosted Evergrande’s shares to their highest single-day gains in a year. Still, the crisis is threatening to drag down home prices and pile pressure on the broader economy. In an effort to reduce its exposure, Chinese Estates Holdings, a major backer of Evergrande, announced Thursday that it plans to sell its 751 million shares because of concerns about the stock’s volatility.
A knock-on effect for property, where the majority of urban household wealth is stored, could spark widespread anger from homeowners. Buyers of unfinished Evergrande apartments, as well as company employees and suppliers, have staged protests across China in recent weeks in a bid to press authorities into ensuring they are not left out of pocket.
Such public displays of discontent from the middle-class are a setback for Chinese President Xi Jinping’s pledge to spread “common prosperity” across Chinese society.
In the United States, investors also appeared buoyed by the latest announcements from the Fed. On Wednesday, leaders signaled that the central bank would not be pulling back just yet on the financial support that has boosted the U.S. economy since the beginning of the pandemic. But officials indicated that the Fed could start to dialing back its aggressive policies later this year, with an interest rate hike arriving as early as 2022.
“Today’s market action is a collective exhale after the Fed,” said Cliff Hodge, chief investment officer for Cornerstone Wealth. “We all know how this will end, especially if the Fed tightens into a growth slowdown, but the timeline has likely been pushed out to 2022.”
Charlie Ripley, senior investment strategist for Allianz Investment Management, said uncertainty had been building around the path of the economy, but the Fed instilled some confidence into markets by signaling it is appropriate to move forward with a reduction in monetary stimulus. In addition, he added, “Other risks that have been weighing on investor sentiment like the debt ceiling and risks associated to China’s real estate market appear to be fading, which have dialed up investor’s appetite for risk.”