Evergrande crisis spill beyond China

China Evergrande have put investors on guard for evidence that the crisis may be spilling over into broader markets. Evergrande was once China’s top-selling property developer. They owe $305 billion and has run short of cash. Investors are worried that a collapse could pose systemic risks to China’s financial system. There have been few signs of stress in money and credit markets. Stan Shipley, fixed income strategist, at Evercore ISI in New York said that the linkage of Evergrande’s debt to other global financial actors is modest. He added that as a result the risk of contagion is small. China has more than enough financial resources to dampen a possible bankruptcy.

In this fraught situation, some investors have forgotten the money market blow-ups during the 2008 global financial crisis. The coronavirus pandemic that shook the global economy and led to massive bailouts from central banks.

Some key barometers of market stress investors are watching, such as the U.S. LIBOR-OIS, which measures the difference between secured and unsecured lending in the United States. This is seen as one measure of strain in money markets. Then the FX SWAPS, cross currency swaps that allows the investors to raise funds. In other words, investors have to pay around 11 basis points over interbank rates. Next is the VOLATILITY IN BONDS, FX, STOCKS. Volatility for the three asset classes such as the stocks, bonds, currencies. And that has remained comparatively subdued. Lastly, the CREDIT DEFAULT SWAPS, that offers insurance on corporate bond holdings. A higher price on the CDS index indicates investors are less concerned about potential high-yield defaults. The spread of the ICE BofA High Yield Index, is in line with the CDS index.