In China, a company called Evergrande promised to deliver apartments to some 1.5 million buyers, who are still waiting for their keys.
At first blush, this might sound like an unfortunate story out of China with little relevance to your portfolio. But it’s in fact the biggest financial crisis roiling China at the moment, and investors around the world are already getting a glimpse of the havoc it could wreak if it were to spread globally. Evergrande is $300 billion in debt. (For comparison, that is more than the external debt of many countries.) It’s widely expected to default on its bond payments, and speculation is running wild about whether the Communist Party in Beijing will intervene.
China has a lot of tools to prevent a full-blown crisis and much of Wall Street believes Beijing will use them if necessary. The consensus, generally, is that no, this isn’t going to trigger another financial crisis à la Lehman. Here is a helpful explanation of why it won’t.
Here’s why this is happening, and what it could mean for your money:
The rundown, in 140 characters or less:
A huge Chinese property developer owes tons of money to lots of people but may not be able to repay. Failure could cause a global crisis.
Reasons to care about Evergrande’s failure:
China is a major driver of global growth, so problems there often spell trouble elsewhere. In a worst-case scenario, Evergrande-related stress could spread across the world’s financial system and freeze credit markets around the world. Some are describing it as China’s “Lehman moment.” Others say that this comparison is completely overblown.
Reasons to care about Evergrande’s success:
Maybe Evergrande is just too big to fail. That’s what some have been suggesting lately, given that the firm has 1,300 projects in more than 280 cities.
The Chinese government cares a lot about stability, so it could step in. But this is the sort of problem parents face when they give children candy to quiet them down. Saving the company could incentivize more bad behavior, from Evergrande or others: “moral hazard,” or the tolerance for risky moves in the belief that the state will always bail you out in case of trouble.
What this could mean for your money:
Expect more turbulence and uncertainty. Even companies that didn’t appear closely connected to Chinese real estate — think Twitter and eBay — fell this week. Art Hogan, chief strategist at National Securities, made an interesting point here. “Does it make sense for technology stocks to be selling?” he said of the Evergrande crisis. “No, but in a risk-off scenario, everything tends to be for sale — even cryptocurrencies.”
What are financial advisers telling their clients?
I emailed this question to Mark Struthers, a financial planner at Sona Wealth in Minnesota. Yes, Minnesota is not China. But I wanted to ask someone far from China about the situation, given we have heard so much about the possibility of global contagion.
He told me:
There will always be Evergrande-type risks in the market. In fact, it is these types of risks that give you the excess return. Dealing with and ignoring the Evergrande-type events is the price of admission. Any moves in the client’s portfolio should be small and tactical. Be thankful for the risk and try to visualize the return you will get three-to-five years out by sticking to your plan.
Evergrande is a reminder of the importance of diversification. The diversified investor most likely only has 2.5%-4.5% exposure to China. If you have more than 5%-6%, you should take a hard look at the diversification of your portfolio. Even the worst-case scenario for China would have a minimal short-term impact on most portfolios. Long-term contagion is unlikely. The world economy would be stronger with a healthy China, but even with a sick China, the world economy will still grow and give return to those with a long-term approach. If a client is diversified and has the proper risk-return profile, then Evergrande has no bearing on the client reaching their long-term goals.
Today was supposed to be a big test for the company. It’s one of the reasons the story became so explosive this week. Some $83.5 million of interest on a five-year dollar bond was set to come due today for the firm (it has a 30-day grace period). However, on Wednesday a unit of Evergrande said a coupon payment had been resolved with bondholders in private negotiations. An injection of short-term cash by the People’s Bank of China also lent support to fragile sentiment, helping steady assets.
Investors are waiting to see whether China is prepared to step in. But as you now know, that comes with consequences, too. — Charlie Wells
- A $100 million loan on Donald Trump’s Fifth Avenue tower was moved to a watch list because of “lower average occupancy.”
- Oxford and Cambridge lost the top spots in a U.K. university ranking.
- The global housing market is broken, and it’s dividing entire countries.
- Meanwhile, Americans haven’t been this down on the housing market since 1982.
- The U.S. will open air travel to most vaccinated foreigners.
- The taper that will really bite into U.S. growth isn’t the fed’s.
- These are the world’s richest families.
- Wall Street influencers are making $500,000, topping even bankers.
- The hottest tax break for the rich is a middle-class retirement account.
- It’s costing women in Texas hundreds of dollars more now to get an abortion.
The U.S. Federal Reserve will review its rules governing personal investments after two policy makers disclosed transactions that raised both eyebrows and issues of potential impropriety. I’m with Senator Elizabeth Warren in agreeing that the ownership and trading of individual stocks by public officials in such sensitive roles shouldn’t be allowed. In fact, I’m struggling to generate a single argument in favor of letting such potential conflicts of interest arise.
Read his full argument here.
You Ask, We Answer
I’m 40, male and terrible with managing money. I make $100,000 a year and can’t seem to save for the life of me. I want to buy a house but the market is too tough right now. I’ve been saving for a bit this year, have $20,000 and I don’t know what’s best to do with it. I pay my bills and have good credit. I have just under $10,000 left to pay on my car, just under $10,000 on a personal loan and $19,000 in credit card debt. So I think the best thing I can do is pay the car and personal loan off then get another personal loan to pay off the credit card at a lower interest rate. Would you agree or is there a better way to grow that $20,000 and reduce my debt? — Matt Maldonado, Austin, TX
Asking for help demonstrates courage. If you can obtain a credit card with a lower interest rate, you could save some money there. If the rate on your personal loan is higher than your car’s, consider paying off this loan first. You can apply this “found” money to your credit card payments. I don’t recommend investing dollars that you may need to access in less than three years because I would not want you to have to sell at an inopportune time. If you qualify, consider opening a Roth IRA for 2021. If your tax filing status is single, your modified adjusted gross income (MAGI) must be $140,000 for the tax year 2021. You can contribute $6,000 to a Roth for tax year 2021. You could open a Roth in October and establish an arrangement from your savings account in the amount of $1,000, you will still be able to maintain your cash reserves and take advantage of tax-free growth. — Marguerita Cheng, CEO, Blue Ocean Global Wealth
Send us questions about your own financial dilemmas to firstname.lastname@example.org.
- Nike reports earnings today.
- FedEx holds its annual general meeting on Monday.
- Warby Parker is expected to IPO on Wednesday.
— With assistance by Alex Millson, Sofia Horta e Costa, Vildana Hajric, and Katherine Greifeld