Evergrande's countdown
By Justin Pyvis – Delivered on 07 Sep 2021

Good morning! Victoria crossed a milestone that will bring up some bad memories for many yesterday, recording 246 new cases – the most in a day since 16 August 2020 during the state's marathon 4-month lockdown.

On a brighter note, the head of Australia's Operation COVID Shield Lieutenant General John Frewen confirmed that logistics and hesitancy will now be the constraints to getting Australia fully vaccinated, rather than supply:

"Supply isn't the great challenge now. It really is about people coming forward and I really encourage everybody who hasn't done so to get a booking and get vaccinated."

Moving across the Tasman, New Zealand's Prime Minister Jacinda Ardern announced that the lockdown outside of Auckland will end at 11:59pm tonight, allowing most businesses and schools to reopen.


Daily % change







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Note: Brent oil, gold bullion and iron ore prices are the second futures contract.

US markets were closed for labour day on Monday.

Locally, the ASX200 inched up 0.07% despite a -10.9% fall for iron ore giant FMG, which traded ex-dividend for the first time. The iron ore price was also hit hard as Evergrande's issues continue to fester (see below) and the government's steel production curbs bite – according to the China Iron and Steel Association, steel production was down 4% between 21-31 August.

Another notable loser on the day was lithium player Pilbara Minerals, which fell 5.3% after Mineral Resources revealed it had offloaded a stake worth about 5.4% of the company over the weekend at a nearly 10% discount to Friday's close.


Still hiring: According to ANZ Australian job ads fell 2.5% in August but remained 79% above where they were a year ago, when most of the country was locked down. Adverts in Victoria actually increased in the month, "providing evidence that job ads and employment should recover quickly again once restrictions ease".

Inflation watch: Nothing to see in Thailand, where headline consumer price index actually declined by 0.02% in August from a year ago, although the data are rubbery "due mainly to government subsidy measures".

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Evergrande's countdown

China's President, Xi Jinping, has a $US300 billion problem in the form of China Evergrande Group, which only three years ago was the world's most valuable real estate group.

Stepping back: According to Bloomberg, last week Evergrande's cash and equivalents plunged to a six-year low, its dollar bonds hit record lows (30 cents on the dollar) and its yuan bonds are no longer even accepted as collateral. Worse, "some non-bank creditors [i.e. shadow banks] have demanded immediate loan repayments", squeezing Evergrande's liquidity to the point where it's on a countdown to insolvency.

In a desperate bid to raise cash, Evergrande has been "offering steep discounts on its properties", but that hasn't stopped the rot – sales fell 26% in August from a year ago.

Why this matters: Close to half of China's iron ore consumption is used in construction, with a reasonable amount of that (~40%) purely for the construction of residential buildings. Australia exports a lot of iron ore – $A17.5 billion in June alone. Even if Beijing steps in and rescues Evergrande, a slowdown in China's property market and therefore steel consumption could result in significantly weaker iron ore prices.

Looking forward : Last year Ken Rogoff and Yuanchen Yang released a paper called Peak China Housing, in which they estimated that "a 20% fall in real estate activity could lead to a 5-10% fall in GDP, even without amplification from a banking crisis". They noted that since 2013 – the year Xi Jinping became President – "real estate investment increased by 30% and [the] household leverage ratio rose from 33% to 60%", causing "severe price misalignments and regional supply-demand mismatches, making an adjustment both necessary and inevitable".

Beijing will be well aware of the risks posed by Evergrande's looming insolvency and its potential impact on the country's property and financial sectors. But that doesn't mean it has a neat, clean and politically acceptable solution to a problem of its own making – the last thing Xi Jinping wants to be seen doing is bailing out billionaire property developers as he tries to sell the people on "common prosperity".

The Wrap Up
  • 🎁 Playing favourites: Last month NSW received 45% of the nation's Pfizer doses allocated to GPs by the federal government, with the extra doses coming at the expense of VIC, QLD and WA.
  • 🗳️ Former Victorian opposition leader Matthew Guy will challenge Michael O'Brien for leadership of the state's Liberal Party later this morning.
  • 💉 Salman Zarka, head of Israel's coronavirus czar, said "Given that that the virus is here and will continue to be here, we also need to prepare for a fourth injection... This is our life from now on, in waves."
  • 🤦‍♀️ Out of touch – 11 US House Republicans signed a letter addressed to Yahoo! CEO Marissa Mayer asking her not to comply with a records request. Unfortunately, she hasn't been CEO since 2017...
  • ☎️ Telstra will require all of its employees who have "regular contact with customers, the public or other employees" to be fully vaccinated against COVID-19 by 15 November.
  • 🏥 The latest figures from NSW Health show that at least 11% of the state's COVID-19 cases in the current Delta outbreak have required hospitalisation.
  • 🛂 Italy, the Netherlands and Sweden became the first nations to impose the EU's recommendation to ban travel to those who have been in the US, or require 10 days of quarantine if they are fully vaccinated.
  • 🐱‍💻 Bitcoin became legal tender in El Salvador today. The nation has purchased its first 200 bitcoin and "will be buying a lot more".
  • 🦗 England lost all 10 wickets for 110 runs on the final day against India, going down 2-1 in the series with one test to play.
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