Emerging market stocks fell 0.8% on Thursday, putting them on course for their worst week in a month on investor fears of contagion from a potential downfall of embattled Chinese property developer Evergrande.
Shares in China’s no. 2 property developer lost 6.4%, taking losses so far this week to near 30%, after it applied to suspend trading of its onshore corporate bonds following another downgrade.
Hong Kong stocks dropped to their lowest this year, and mainland shares gave up more than 1% as other property stocks also sold off.
MSCI’s index of EM shares has fallen every day this week due to China’s increasing business regulations, weak economic data and Evergrande woes.
Given that the impact on China’s credit market has been focused on the property sector and only on those names that have had trouble raising funds, the impact on other sectors as well as broader emerging markets should be limited, said Eugenia Fabon Victorino, head of Asia strategy at SEB in Singapore.
“But it would really depend on how this is resolved. Historically the resolution of defaults in China has been quite fast although there has been a process wherein the domestic stakeholders have a limited fallout,” she said.
“Limiting that will also limit the risk of this becoming a systemic risk… The big banks in China are comfortably above the regulatory capital ratios, and should be able to take the hit.”