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Big Sell-Off In Chinese Real Estate Stocks Caused Worldwide Market Dip

ARI SHAPIRO, HOST:

There was a major sell-off in markets around the world today. The Dow fell 614 points, or about 1.8%, its worst day in more than two months. It did recover some of those losses at the end of the trading day. The big dip was all sparked by a Chinese property company that many Americans have never heard of. NPR's David Gura joins us to explain.

Hi, David.

DAVID GURA, BYLINE: Hey, Ari.

A SHAPIRO: First, tell us about what happened today.

GURA: So this is the world in which we live. I mean, one company can affect markets worldwide. There was this big sell-off in Chinese real estate stocks and one company in particular. The Evergrande Group is a real estate developer. It's a massive conglomerate based in the city of Shenzhen. And it's one of the largest companies in the world, with a debt burden of $300 billion. That's how much it owes its creditors. Now, sales have been down, and Evergrande has been trying to cut costs and offload buildings. But none of that has worked, and the company has told investors it may not be able to pay its bills. So that's how the trading day started, and it led to losses in Europe and the United States.

A SHAPIRO: You say we live in this world now where one company's well-being can affect worldwide markets. Explain why investors in London or New York would care about this real estate company in China.

GURA: Yeah. Wall Street was already on edge, concerned about the spread of the delta variant and the effect that could have on the economic recovery. Markets have been lagging in September so far. But when a company of this size faces a credit crunch, investors around the world get nervous because companies anywhere can hold some of that debt. Now, Jill Carey Hall is a senior equity strategist at Bank of America, and she says this is something she is going to monitor.

JILL CAREY HALL: The good news for the S&P 500 is there's not as high of a proportion of direct exposure to the region as some other regions within the world.

GURA: But a couple of other things are at play here, Ari. One of them is how it affects sentiment. That was already very weak, again, because of COVID-19. It also makes them nervous when they see something like this happening - a company of this size in this condition, then this kind of sell-off. And No. 2 is this big unknown - what, if anything, the Chinese government is going to do about Evergrande. And will that affect China's financial system? Chinese government's been cracking down on real estate developers, and it's unclear if the government will step in to keep Evergrande from collapsing.

A SHAPIRO: There's another factor here in the U.S., which is the potential debt default. Tell us about the impact that could have.

GURA: Yes. There's one in the U.S. as well - a potential one in the U.S. as well. Wall Street is watching what's unfolding in Washington as the U.S. is once again up against what's called the debt limit or the debt ceiling. Congress puts a limit on how much the government has available to pay its existing debts.

Now, lawmakers have raised the ceiling dozens and dozens of times, but there is not much more the treasury secretary can do if lawmakers don't raise it again. Janet Yellen has written to Congress. She's urged them to raise that limit. She has an op-ed in the Wall Street Journal describing what could happen if lawmakers do not act. And Yellen doesn't say the world is going to end, but she comes pretty close. She writes, (reading) it would likely precipitate a historic financial crisis and default that could trigger a spike in interest rates, a steep drop in stock prices and other financial turmoil.

A SHAPIRO: What does this likely mean for the days ahead?

GURA: Yeah, it's a busy week. On Tuesday the Federal Reserve kicks off a two-day meeting. It's expected the Fed chair and his colleagues will begin talking about how to reduce some of the financial support that's been propping up the markets since the pandemic started now more than a year ago. The Fed has been buying tens of millions of dollars' worth of bonds and mortgage-backed securities month after month, and now it is poised to start scaling that back. Investors are going to listen closely what Fed Chair Jerome Powell has to say about the state of the economic recovery. We'll see if his comments already have changed at all in light of new data. And, you know, something Powell has said from the beginning of this crisis is the path of the economic recovery is determined by COVID-19, the virus continuing to be a big worry for economists and for investors especially as the spread of the delta variant continues.

A SHAPIRO: NPR's David Gura, thanks a lot.

GURA: Thank you, Ari.

(SOUNDBITE OF ARCADE FIRE SONG, "CREATURE COMFORT") Transcript provided by NPR, Copyright NPR.