· China’s regulatory crackdown is still ongoing with the latest newsflows on tighter control to Macau’s casinos and pressure piling on Hong Kong property developers to back Beijing’s interests. Fear of contagion from the Evergrande crisis is also intensifying, hitting the Chinese property and financial sectors. As a result, a sell-off in offshore Chinese equities of over 4% was seen this morning.  

There are concerns that the debt problems with the so called “too big to fail” Evergrande could be China’s “Lehman moment” as any miscalculation could lead to mass contagion across the Chinese financial system. We think debt restructuring is a more likely scenario, while disorderly bankruptcy and full liquidation is the worst case scenario.   

As the government stays silent in the meantime, the uncertainty around the endgame of Evergrande will lead to high volatility in the Chinese asset markets in the near term. Nevertheless, any indiscrimate sell-off would offer medium-term opporunties in sectors with governemnt policy support, such as EV supply chains, semiconductor, renewable energy, high-end manufacturing as well as consumer and healthcare leaders.

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