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What happened
Actions of Ali Baba (NYSE: BABA), the Chinese tech giant, today plunged into a large sell off of Chinese stocks in response to news that Chinese real estate giant Evergrande Group could be forced into bankruptcy.
Alibaba closed down 5.4% while the ETF MSCI China lost 4% and the S&P 500 fell 1.7%.
Image source: Alibaba.
So what
The Evergrande group owns around $ 300 billion of real estate in China and warned in an update earlier this month: “There is no guarantee that the group will be able to meet its financial obligations under financing documents and other relevant contracts.
Fears of a housing bubble have lingered in China for several years amid reports of ghost towns or skyscrapers being built in new towns with no occupants, and some investors seem to believe Evergrande could be the first domino to fall in a possible financial crisis. crisis.
Alibaba, whose business revolves around e-commerce, does not have direct exposure to the real estate market, but as one of the largest consumer companies in China, its outlook is directly related to the overall health of the market. Chinese economy.
If Evergrande were to default and the Chinese economy stagnated, Alibaba would be impacted.
Now what
Things were already tough for the Chinese tech giant before today’s news broke. The action has crackled since Chinese authorities began to tighten regulations on Alibaba and its peers, starting with the blocking of Ant Group’s IPO and including a $ 2.8 billion fine against the company. company in April for violations of antitrust laws.
Today, Alibaba shares hit their two-year low, a sign that high-level concerns about China continue to outweigh the firm’s strong performance. It’s unclear where Evergrande’s story will go from here, but Alibaba’s actions will remain sensitive to this issue as well as the broader regulatory environment in China. Expect volatility to continue.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
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