Evergrande’s troubles loom over global markets

This is an audio transcript of the FT News Briefing podcast episode: Evergrande’s troubles loom over global markets

Marc Filippino
Good morning from the Financial Times. Today is Tuesday, September 21st, and this is your FT News Briefing.

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The financial crisis at Chinese property developer Evergrande has investors super worried. We’ll take a look at whether the impending collapse will stay contained. Plus, we’ll hear how foreign investors are propping up the US treasury market, why Royal Dutch Shell is selling off a big chunk of its fossil fuel business and how Coinbase has caved into pressure from US securities regulators. I’m Marc Filippino, and here’s the news you need to start your day.

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Global stock markets appear to be really nervous about the Chinese property developer Evergrande. Yesterday, the S&P 500 and the Nasdaq were both down around two per cent. Things weren’t much better in Europe. Now, Evergrande is the world’s most indebted property developer, and all that debt is coming home to roost. Investors are increasingly nervous that the company will default and trigger a domino effect through global financial markets. Here’s the FT’s Katie Martin.

Katie Martin
You can line it up against the scale of all the crises that have been globally important and systemic to the entire financial ecosystem. You can compare it to things like Lehman Brothers. You can compare it to things like the Greek crisis. You can compare it to the subprime crisis in the States. But what was different about those crises is that they had little links, little roots into the global banking system. And that’s what means that a crisis that happens in one place can have a really severe impact somewhere else. And in this case, the bet up to now has been that’s not going to happen in the case of Evergrande, and chances are that’s still the right analysis, that the chances are the right analysis is still the central bank in China, the People’s Bank of China, will step in to (inaudible) take further actions to dull the impact of this horrible unravelling of Evergrande on the rest of the Chinese economy, on the rest of the Chinese property sector.

Marc Filippino
Katie, are there other ways an Evergrande default or any crisis in China’s property market, really, could affect global markets?

Katie Martin
So, for example, the Chinese property sector is an enormous consumer of commodities, and so if there is a really severe pullback in the entire Chinese property sector, that means there’s going to be less demand for things like steel and copper. Could this affect miners elsewhere? Could this affect bunch of different companies elsewhere? That’s what’s starting to eat into the rest of the system. The big question is, is this the start of something really huge and horrible or is this still a crisis that is contained within China? You know, this is probably just a bit of an opportunity for a pause. It’s a loss of momentum. It’s a pullback. It’s not, you know, a full-blown crisis. It’s not sort of thing that we saw in March 2020. So if there is a way for this for Evergrande to take down a big international bank, I’m yet to hear it.

Marc Filippino
Katie Martin is the FT’s markets editor.

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Investors are also keeping an eye on the Federal Reserve. This week, top officials at the US central bank will meet, and investors are looking for clues about when they’ll start tapering the pandemic bond purchasing programme. The move could drag down government bond prices given the loss of demand. But the FT’s Kate Duguid reports there’s a big demand for US treasuries coming from elsewhere.

Kate Duguid
So we’re seeing evidence that a lot of this demand is coming from China and Japan. Both of those countries are already the two biggest holders, overseas holders of US debt, but demand has been ramping up.

Marc Filippino
Yeah, why is that?

Kate Duguid
So the first thing is that the US Treasury market is the safest and the most liquid market in the world. So there’s always, you know, a large amount of demand for US debt. But it’s also the case that the yields on US debt is higher at the moment. And so we’ve seen demand from all over the world, but in particular from from China and Japan, who always have a certain amount of demand for US debt increasing in order to maximise their returns on the safest possible debt. It’s also the case that expectations for growth in the US are slightly higher than in some other G10 countries. And so higher economic expectations also drives yields on government debt higher. And so there’s also demand from foreign investors for that reason.

Marc Filippino
So what does this mean for bond markets, Kate, if Treasury prices and yields stay steady?

Kate Duguid
What it could mean in the longer term is that when the Fed begins to wind down its pandemic era monetary policy, that this demand might prove a counterbalance. So typically, when the Fed withdraws its support, yields would rise. Right, that there’s a huge amount of supply, that the Fed isn’t buying as many assets. And so a lot of assets are available to normal investors and that would typically drive prices lower and yields higher. But given that demand is so strong, we might not see those effects. It might be the case that yields continue to stay low, prices continue to stay high. It also means that the returns on US government debt are going to stay somewhat limited.

Marc Filippino
Kate Duguid is the FT’s US capital markets correspondent.

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Royal Dutch Shell is making another move as part of its shift away from fossil fuels. Yesterday, Shell agreed to sell its business in a US oil drilling region known as the Permian Basin. Rival ConocoPhillips will buy the operations for nine and a half billion dollars in cash. The area is in west Texas and southeastern New Mexico, and it’s the biggest oilfield in the US. In May a court in the Netherlands ordered Shell to slash its net carbon pollution. Shell said $7bn from the sale will go to shareholders and the rest will be used to pay down debt.

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Financial regulators around the world are grappling with cryptocurrency companies. The top US regulator, the Securities and Exchange Commission, has taken a tough stance and in one case threatened to sue the country’s largest cryptocurrency exchange called Coinbase if Coinbase went ahead with plans to launch a lending product. Regulators considered it an unregistered security. Now Coinbase has backed down. The FT’s Hannah Murphy calls the move more of a symbolic loss for Coinbase.

Hannah Murphy
It sounds like they first went to the SEC and then the SEC said, no, we don’t want you to do this. At that point, they decided to press ahead anyway. And then it was later that the SEC said, you know, we will sue you if you do keep on pressing ahead. So it sounds like they did have sort of not one but two warnings and eventually they will have consulted with lawyers, one imagines, and decided the best way forward is just to step back. There’s one other aspect to this, which is that state regulators are pursuing some of their peers in the crypto space. So on Friday Celsius, which also offers crypto lending sort of interest-bearing products, was ordered to stop by the state of New Jersey, stop ordering those products, and BlockFi, another lending platform also has similar actions being pursued by the three states. So that does seem to be a sort of regulatory momentum around these particular lending products.

Marc Filippino
So, Hannah, what does Coinbase’s decision mean for other cryptocurrency companies?

Hannah Murphy
So I think this will be concerning to other crypto lenders or cryptocurrency exchanges, which also offer these lending products. It may send a bit of a chill round the industry. Those who offer existing products or planning to offer existing products will have to reassess, you know, do we continue to do this? What are the next steps that we should take? It’s important to remember that the SEC didn’t say you can’t do this at all. The SEC told Coinbase, you know, if you were going to do this, you would have to register with us. Now, that involves sort of extra disclosures, a lot of paperwork, more bureaucracy. So one can understand why particularly smaller, more innovative players in the space don’t necessarily want to do that, but that’s still an option for Coinbase.

Marc Filippino
That’s the FT’s tech correspondent Hannah Murphy.

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And before we go, a toast to the beer industry going green (sound of beer can opening). And it’s an interesting alliance. Russia’s aluminium group, Rusal, is teaming up with the US beer behemoth Budweiser to produce ultra-low carbon beer cans. Rusal will provide Bud with five million cans made from aluminium that eliminates carbon dioxide from the smelting process. The cans will be filled in two breweries in the UK that are powered by renewable electricity. It’s only a tiny fraction of all the beer cans that are made. But a top official with Rusal’s parent company called it the first commercial roll out of a near-zero carbon aluminium that’s been done at scale.

You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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