Wall Street Crashes as Fears Over Possible ‘Contagion’ From Chinese Property Bubble Mount

AAN: The Dow Jones Industrial Average DJIA, -1.84%, the S&P 500 index SPX, -2.00% and the Nasdaq Composite COMP, -2.48% indexes were all facing sharp declines at Monday’s open.

However, the sharp downturn by the highly leveraged real-estate sector, which the Financial Times notes makes up more than 28% of China’s economy, isn’t the only problem for markets on Monday.

The Dow Jones plummeted more than 600 points on Monday morning over fears that a massive Chinese property bubble might create a new ‘Lehman Brothers’ moment.

As Fox Business reports:

The Dow Jones Industrial Average plunged 586 points, or 1.7%, while the S&P 500 index and the Nasdaq Composite index declined 1.69% and 1.99%, respectively.

Chinese real estate developer Evergrande’s shares tumbled more than 15% Monday amid worries the company will not be able to make a debt payment later this week.

Some market watchers have called Evergrande China’s “Lehman Brothers moment,” drawing comparisons to the collapse of the U.S. investment bank, which began the 2008 financial crisis.

Hong Kong’s Hang Seng index tanked 3.3% while China’s Shanghai Composite was closed for holiday. The selling spilled over into Europe, where Germany’s DAX 30 fell 2.%, France’s CAC 40 lost 2.39% and Britain’s FTSE 100 dropped 1.61%.

The Dow Jones plummeted more than 600 points on Monday morning over fears that a massive Chinese property bubble might create a new ‘Lehman Brothers’ moment.

As Fox Business reports:

The Dow Jones Industrial Average plunged 586 points, or 1.7%, while the S&P 500 index and the Nasdaq Composite index declined 1.69% and 1.99%, respectively.

Chinese real estate developer Evergrande’s shares tumbled more than 15% Monday amid worries the company will not be able to make a debt payment later this week.

Some market watchers have called Evergrande China’s “Lehman Brothers moment,” drawing comparisons to the collapse of the U.S. investment bank, which began the 2008 financial crisis.

Hong Kong’s Hang Seng index tanked 3.3% while China’s Shanghai Composite was closed for holiday. The selling spilled over into Europe, where Germany’s DAX 30 fell 2.%, France’s CAC 40 lost 2.39% and Britain’s FTSE 100 dropped 1.61%.

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If the property giant does default on its massive debt there is a risk of a potential worldwide financial contagion spreading, as Marketwatch explains:

But in the event of liquidation, there would likely be a “high degree of contagion,” they warned. The spillovers would occur, they said, through three channels:

1. Investors getting extremely low recovery values, something which would lead to a material loss of investor confidence in the broader property sector and Asia high-yield offshore market and create spillover into the broader Chinese financial assets.

2. A domino effect of credit events, given that both banks and nonbanks with large exposures to Evergrande could potentially go under or be forced into restructuring. This would again create spill over into other Chinese financial assets and drive underperformance of financials in particular across both [developed market] and [emerging market] credit/equity markets, led by those names with direct exposure either to Evergrande itself, its subsidiaries or its creditors.

If the property giant does default on its massive debt there is a risk of a potential worldwide financial contagion spreading, as Marketwatch explains:

But in the event of liquidation, there would likely be a “high degree of contagion,” they warned. The spillovers would occur, they said, through three channels:

1. Investors getting extremely low recovery values, something which would lead to a material loss of investor confidence in the broader property sector and Asia high-yield offshore market and create spillover into the broader Chinese financial assets.

2. A domino effect of credit events, given that both banks and nonbanks with large exposures to Evergrande could potentially go under or be forced into restructuring. This would again create spill over into other Chinese financial assets and drive underperformance of financials in particular across both [developed market] and [emerging market] credit/equity markets, led by those names with direct exposure either to Evergrande itself, its subsidiaries or its creditors.