The pre-eminent benchmark of the Australian share market, the S&P/ASX 200 Index (ASX: XJO), narrowly avoided its third consecutive negative session on Friday. Today's feeble finish to the week coincides with a financial milestone for Chinese property developer, Evergrande.
The Aussie index closed 0.07% higher at 7,152 points after clawing its way back from a hellish start. Despite the green finish, the ASX 200 stripped away 2.5% of the value it had heading into the week.
Ironically, real estate was the best-performing sector of the bunch today, lifted by a cracking performance from Goodman Group (ASX: GMG) shares. Yet, an unease reverberated in the proverbial economic discussion room today as questions about China's future arose.
Evergrande utters the dreaded 'B-word'
Unfortunately, it was not a joyous occasion for China's second-largest real estate company today. After first struggling to meet its debt obligations all the way back in 2021, the property developer filed for bankruptcy protection in the United States last night.
The Chapter 15 filing means Evergrande will seek to restructure its debts while attempting to protect US debtor assets. In a way, it marks a final effort to agree to new terms for its obligations to avoid complete financial loss.
Putting the financial strain into context, the Chinese company had racked up an estimated A$468 billion in debt. To make matters worse, Evergrande had not been profitable during the last two years, recording over A$100 billion in losses.
Notably, the weakness in China's property market persists despite the country's central bank cutting interest rates twice in the past three months. This runs counter to the ongoing monetary tightening conducted by other central banks worldwide.
Will it hurt the ASX share market?
When the world gets a little more chaotic, you can rest assured fortune tellers will be rubbing their hands together. The uncomfortable truth is no one can give a concrete answer to what will happen next. However, there are a few thoughts to consider.
Firstly, Ray Dalio — founder of hedge fund Bridgewater Associates — penned his take on LinkedIn today.
In short, the billionaire investor believes China requires a 'big debt restructuring' — a regular act throughout history in many countries. In fact, Dalio notes the United States has had three during his lifetime.
If done correctly — what Dalio refers to as a "beautiful deleveraging" — the fallout might be mitigated.
However, if matters were to worsen, Australia is certainly exposed. In 2022, China was our largest trading partner, accounting for approximately 26% of Australian exports. Likewise, the People's Republic constituted the largest source of gross domestic product at 12.3%.
Furthermore, 26% of the combined market capitalisation of the top 15 ASX-listed companies is confined to three iron ore miners — BHP Group Ltd (ASX: BHP), Fortescue Metals Group Ltd (ASX: FMG), and Rio Tinto Ltd (ASX: RIO).
China is a major customer of much of the iron ore produced in Australia. Therefore, economic weakness, particularly in property development, could weigh on the benchmark index.
Not the only troubled developer
Evergrande is not the only giant garnering concern. Yet another Chinese property developer's financial robustness was questioned this week as Country Garden failed to pay the interest on its bonds.
As it stands, Country Garden still has a grace period to meet its obligations. Though, some onlookers are already wary of what could play out.
Bloomberg analyst Kristy Hung highlighted that Country Garden has four times as many projects as Evergrande. As such, Hung believes any default would impact China's housing to a greater extent than what has already transpired.
