China markets: Investor sentiment suffering from a multiple-whamm
#Podcast — 20.09.2021

CHINA MARKETS: INVESTOR SENTIMENT SUFFERING FROM A MULTIPLE-WHAMMY

Grace Tam, Investment Advisor

China: Bad news is good news?

· 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.   

 

Scenarios for the Evergrande crisis

Base case scenario – Debt restructuring with a haircut

Worst case scenario – Disorderly bankruptcy & full liquidation

Implications

•       Evergrande’s bond prices have already reflected this scenario.

•       Investor sentiment has been shaken with larger sell-off in offshore equity indices & some weakening in CNH today (domestic A-shares & CNY markets closed for holidays)

•       Beijing emphasizes social & economic stability

•       Easing measures if necessary - the PBoC’s liquidity injection last Friday was the highest since February 2021

•       Detrimental to financial stability & economic growth given financial institutions’ huge loan & bond exposure to Evergrande & the property sector 

•       Significant loss in investor confidence that would spill over to other asset markets 

Degree of contagion

Lower

Very High

 

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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