U.S. stocks fell sharply Tuesday, with the Dow Jones industrial average dropping more than 1,000 points after the largest shareholder in a Chinese real estate giant went public with a warning about possible default.
Evergrande Real Estate Group Ltd. warned that the company’s failure to make its end of fiscal year debt payments could result in losses that would be more than $3 billion (6.5 billion yuan). Shareholders could also lose hundreds of millions of dollars, the company said.
The comments come amid a sharp sell-off in Chinese stocks and a warning about default risk from U.S. bondholders of a Chinese drugmaker.
A $10.1 billion bond issue for the China Evergrande Group offered by Morgan Stanley’s Global Emerging Markets Bond Index is expected to experience high redemption rates of 92 percent, a sharp deterioration from the company’s ability to repay debt over the past 12 months, according to a report last week by ratings agency Moody’s.
To avoid the firm’s debt defaults and risky valuation, Morgan Stanley said the deal is likely to be sold to a special purpose vehicle and sold into the securities market at a discount.
Cities that have reached record levels of home prices have seen land prices quickly climb as well, which has driven prices of new homes to record highs. Data from Chinese government agencies showed median home prices in 69 cities rose at their fastest rate in two years in December, with the increase accounting for 9.1 percent on the year.
Mainland Chinese developers have increased their efforts to take advantage of low interest rates in the mainland to fund their expansion plans, and the increasing price of land has made it difficult for private developers to compete for land in Beijing and Shanghai.