Why the Fortescue (ASX:FMG) share price is up 5% today

Fortescue shares are finally in the green …

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The Fortescue Metals Group Ltd (ASX: FMG) share price is bouncing off 14-month lows, up 4.95% to $15.48.

The broader S&P/ASX 200 Index (ASX: XJO) and, more specifically, the resources sector has reacted positively to news that China’s embattled real estate developer Evergrande will meet its bond interest payments due Thursday, 23 September.

At the time of writing, the ASX 200 is up 0.74% to 7,327.7 with the S&P/ASX Energy (INDEXASX: XEJ) and S&P/ASX Materials (INDEXASX: XMJ) indices up 2.53% and 2.51% respectively.

What’s the significance of Evergrande’s repayments?

China’s second-largest real estate developer is on the verge of collapse as it struggles to find the liquidity to pay off upcoming liabilities.

The Evergrande debacle has exposed the vulnerable underbelly of Chinese property developers taking on dangerous amounts of leverage with a dependency that housing prices will continue to boom.

Evergrande’s US$300 billion in liabilities is tied to more than 128 banks and 121 non-banking institutions, meaning its default could spark a domino effect across the Chinese and, potentially, global economy.

Evergrande calmed nervous markets on Wednesday, saying it will make a coupon repayment on its bonds due Thursday, 23 September.

According to Reuters, Evergrande appointed Houlihan Lokey and Admiralty Harbour Capital as joint financial advisers last week. The two firms will evaluate the Group’s financial position and explore solutions to ease its dire situation.

A slowdown in China’s property and construction sectors have significant flow-on effects for the price of iron ore and, subsequently, the Fortescue share price.

According to S&P Global, China’s property and infrastructure construction accounts for 55% of its steel consumption.

Fortescue share price bounces as iron ore prices trade flat

Iron ore prices have dropped sharply lower in the past few days, falling from US$123.84 a tonne last Monday to US$93.03 a tonne on Tuesday, according to Fastmarkets.

Iron ore logged steep losses almost every day, with its first positive green day on Tuesday, edging 5 US cents higher to US$93.03.

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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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