But Wait! There’s More!

Remember when contagion was just the ominous title of a 2011 movie dealing with a deadly disease spreading quickly around the globe while healthcare professionals scrambled to find a cure?  The premise was that a previously unseen threat reached a critical level which set off a cascade effect, reaching many facets of life.  Could such an event happen outside of Hollywood?  In short, yes. 

China might be in the midst of one now.  Several months ago, financial markets experienced an episode of volatility when Evergrande, an indebted Chinese firm, was unable to make payments in accordance to their contracts.  Suddenly, however, the narrative disappeared from the headlines, but the larger story seems to be pushing for a new position above the fold in the press. 

An American credit-rating agency, Fitch, downgraded their outlook for the real estate firm, declaring Evergrande failed to pay $82.5 million due earlier this week.  You might be thinking that contagions aren’t comprised of individual events.  And you’re right.  Just like the movie about some fictitious disease, contagions have knock-on effects.  The agency also downgraded Kaisa, another Chinese property firm which didn’t pay back $400 million due Tuesday.

Second order effects are being felt.  Companies with poor credit records are paying over 20 percent to borrow U.S. dollars in China.  Homebuyers seem to be growing more hesitant there as well.  America’s central bank warned that China’s property-related problems pose a potential threat to the global economy.  The Federal Reserve ought to know as they had a front-row seat during our nation’s bursting real estate bubble in the aughts.

Other dominos could fall in the future.  The strength of the rest of the global economy will be important if they do.  China is the world's second largest economy, and a large supplier of goods to the world.  Additional trouble from within the country might exacerbate an already challenged just-in-time supply chain.