Worried about a stock market crash? Here’s what you should know

Investors are waking up to a sea of red on Tuesday …

a woman bites on her fingernails in an anguished pose of fear and dread.

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The prospect of a stock market crash is likely creeping into the minds of investors this week as China’s second-biggest property developer Evergrande spooks the global financial markets.

Evergrande has around US$300 billion of liabilities to banks and bondholders. Last month, it warned that it may fail to pay its creditors.

Fitch Ratings downgraded Evergrande’s credit rating to ‘CC’ in early September, suggesting “a default of some kind appears probable”.

The real estate conglomerate has a looming US$83.5 million bond interest payment due on Thursday, a major test as to whether or not it has conjured up enough cash to pay bondholders.

Could this cause a stock market crash?

Evergrande’s liabilities are far-reaching and involve more than 128 banks and 121 non-banking institutions, including household names such as BlackRock and Allianz.

Fitch Ratings reported that Evergrande’s credit risk could have broader implications, affecting home builders through to the banking sector.

Fitch said:

In the unlikely event that a default unsettles the broader property market, significantly disrupting sales and investment, this could have farther-reaching macroeconomic effects. We estimate the sector accounts for approximately 14% of GDP.

Risks to our growth outlook on China are mitigated by the government’s capacity to intervene with policies to shore up the housing market, but we believe the threshold for such support will be high — as it might set back other priorities such as reducing real-estate lending concentration and tackling the high cost of housing.

Wall Street cratered overnight, with major indices the Dow Jones Industrial Average, S&P 500 and Nasdaq sliding 1.78%, 1.70% and 2.19% respectively.

Encouragingly, Markets Insider reported that many market experts believe Evergrande is “too big to fail and is likely to be rescued by the Chinese government, limiting the economic impact on China and the world”.

What does this mean for the ASX?

The S&P/ASX 200 Index (ASX: XJO) couldn’t escape the gloom and doom on Tuesday, down 1.3% to a 4-month low of 7,118.

While it might feel like the beginning of a stock market crash, the ASX 200 is still up a comfortable 9% year-to-date.

Investors might want to keep an eye out for the resources sector, given the fact the Chinese real estate and building sector are the main drivers of steel and copper usage, according to Mining.com.

ASX 200 mining heavyweights BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Ltd (ASX: FMG) have cratered under the recent slump in iron ore prices, down 12%, 17% and 40% respectively year-to-date.

Motley Fool contributor Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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