Evergrande: Evergrande a clear & present danger for metals, chemicals

Mumbai: The threat of a default by Evergrande, China’s second-largest real estate company, on debt of more than $300 billion has been roiling the Chinese and Hong Kong markets. It’s having an impact on Indian stocks too.

The selling of metal, steel, iron ore and chemical stocks that started in the middle of last week intensified on Monday. Tata Steel, Jindal Steel, SAIL, NMDC, and

have dropped 10-15% in the last five trading sessions. Among chemical stocks, Tata Chemicals, DCW, Laxmi Organics declined 5% on Monday.

Though Beijing is expected to bail out Evergrande and contain the contagion risk, the global economy will be affected if the Chinese government fails to support the realty company, analysts said.

Indian metals, steel, iron ore, textiles, garments, chemicals and tyres among other sectors are likely to be hit if the Chinese government isn’t too keen on a timely bailout, according to analysts. They advise investors to reduce exposure to mid- and small-cap stocks and switch to large-caps, information technology and pharmaceutical stocks.

“A slowdown in Chinese real estate led by an Evergrande default could drag down growth in the global economy and adversely impact prices of industrial commodities like metals, steel, iron ore among others,” said Gaurav Dua, head, capital market strategy, Sharekhan. “The Chinese government could depreciate the yuan to support its economy by pushing exports, which would mean an increase in competitive intensity in Indian sectors like textiles, garments, chemicals, tyres, among others.”

The real estate sector accounts for close to 29% of the Chinese economy. Evergrande had $110 billion in sales last year. The Hong Kong index has dropped 8% in the previous five trading sessions, while benchmarks in China, France, Germany and the UK have declined 3-4%. Shares of Chinese realtor Sinic Holdings crashed 87% in Hong Kong on Monday.

The Chinese authorities have once rejected the bailout plea of the company. Still, since the global financial crisis, governments and central banks have realised the importance of not letting a default situation get out of hand, said market participants.

“It is important to watch out for the Chinese government’s move. If it doesn’t bail out Evergrande, then it will have ripple effects on the global economy, including India,” said Mahesh Patil, CIO, Aditya Birla Sun Life AMC.