Why are equities ignoring the signs out of China?

Evergrande, which local bonds were suspended today, has effectively gone into a restructuring phase which will cost shareholders and bondholders, but the Chinese government will try to limit the negative effects on the banking industry and the people that are waiting for their homes to be built. However, the stakes are increasing as risk aversion increases in the industry and already now there are signs that other real estate developers are experiencing some increased pressure. The table below shows some of the largest Chinese real estate developers with a combined market value of $131bn and $291bn in short- and long-term interest bearing debt, but total liabilities of $1.06trn. For comparison Lehman Brothers had $613bn in debt when it filed for bankruptcy.

Supply side issues are growing

Iron ore prices have lately been under severe pressure and as more prices of the puzzle are revealed it is now clear that part of the reason is maybe Chinese factories including steelmakers shutting down production due to power shortages. The world is currently facing an ‘energy shock’ with Europe experiencing dramatic increases in electricity and energy prices. Liquified natural gas is in high demand from China and Japan, while Europe is also scrambling to get supplies as Europe has been hit by a perfect storm of lower than normal electricity production from renewable energy sources. At the same time coal prices are soaring as well adding further pressure to Chinese producers which in turn could keep the inflationary pressures running globally.

For now equities are staying calm, but the growing evidence of dissonance in the global economy and equity markets cannot be ignored for too long. The dominos are in motion now and it is just a matter of time before we get a healthy correction in equities reflecting the growing issues in our global economy.