What happened
Shares of Alibaba (NYSE: BABA), the Chinese tech giant, took a dive today in a broad sell-off in 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 China MSCI ETF lost 4% and the S&P 500 pulled back 1.7%.
Image source: Alibaba.
So what
The Evergrande Group owns roughly $300 billion worth 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 the relevant financing documents and other contracts."
Fears of a real estate bubble have lingered in the background in China for several years amid reports of ghost cities, or skyscrapers built in new cities without occupants, and some investors seem to believe that Evergrande could be the first domino to fall in a possible financial crisis.
Alibaba, whose business revolves around e-commerce, doesn't have direct exposure to the real estate market, but as one of the biggest consumer-facing companies in China, its prospects are directly tied to the overall health of the Chinese economy.
If Evergrande were to default and the Chinese economy stalled, Alibaba would be impacted.
Now what
Things were already rough for the Chinese tech giant before today's news broke. The stock has been sputtering ever since Chinese officials began tightening regulations on Alibaba and its peers, starting with its blocking of Ant Group's IPO and included $2.8 billion fine against the company in April over antitrust violations.
Today, Alibaba shares hit a two-year low, a sign that high-level concerns about China continue to outweigh the strong performance of the business. It's unclear where the Evergrande story will go from here, but Alibaba shares will remain sensitive to that issue as well as to the broader regulatory environment in China. Expect the volatility to continue.
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Jeremy Bowman owns shares of Alibaba Group Holding Ltd. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd. The Motley Fool has a disclosure policy.
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