Evergrande Wind Down Crushes Hong Kong Real Estate & Financials

Key News

Asian markets were largely off as China, South Korea, Taiwan, and Japan were all closed today. Markets were off for the Mid-Autumn Festival but it was stocks and not leaves falling today in a crushing rout in Hong Kong. The broad Hang Seng Composite Index only had 39 advancers and 449 declining stocks. Fears that highly indebted real estate developer Evergrande is going to collapse crushed Hong Kong with a particular emphasis on real estate and financial stocks though internet stocks weren’t spared from the downdraft.

Markets have felt jittery following a strong run from US equities in advance of potential Fed tapering, turning down the financial nitrous oxide, with Evergrande’s situation leading to some chips coming off the table. Is Evergrande going to default? Several years ago, three highly indebted Chinese companies teetered on collapse (HNA, Anbang, Fosun). The collapse of those companies could have led to a domino effect of one company taking out its lenders/banks, which would have led to a widespread financial crisis. However, Chinese policymakers would not allow those companies to threaten the financial system. Similarly, I believe Evergrande will be taken over, broken up, and liquidated as it is too big to fail, just as we saw a few years ago.

CNH, China’s offshore currency that trades 24 hours a day, did depreciate versus the US Dollar -0.21%/-0.01 while CNH’s volatility jumped +13.5% overnight. However, CNH volatility has been very low so today’s move isn’t a big surprise.

Evergrande’s Hong Kong listing (3333 HK) hit an all-time low intra-day of HKD 2.28 while their debt, using a bond maturing in June 2026 as a proxy, fell to $26 versus a par value of $100. Equity investors are very likely going to be wiped out while bondholders are going to take a deep haircut in a liquidation.

Evergrande’s situation hammered Hong Kong-listed real estate stocks with 97 stocks falling out of 100 (2 were flat, 1 was up) as Sinic Holdings Group (2103 HK) fell -87%. Banks with loans to Evergrande on their books were hit hard as China Merchants Bank (3968 HK) fell -9.38% along with insurance companies Ping An and AIA, which were down -5.78% and -4.94%, respectively.

Internet stocks were not spared the bloodbath despite little regulatory news. Asia’s US dollar high yield market has been falling due to Evergrande though it could provide investors an interesting opportunity as Evergrande’s fate is decided. Evergrande’s unfortunate situation will force policymakers to make a decision potentially in the next few days. Chatter coming out of last week’s China-US Financial Roundtable included China’s regulators trying to talk down frayed nerves of global investment banks and asset managers. Tencent bought back another 230,000 shares today. 

We had the chance to connect with last week in a call arranged by an institutional broker. The company said they have adopted and adhered to internet regulations and no longer view regulations as an issue. They said Q2 was a challenge due to flooding and Delta flareups though believe policy support will help alleviate the pain.

H-Share Update

The Hang Seng opened lower and quickly went into freefall closing -3.3% on light volume -26% from Friday’s FTSE/Quad Witching massive volume (my Bloomberg terminal refuses to calculate Hong Kong’s historical turnover for whatever reasons; I need to call them today). The 210 Chinese companies listed in Hong Kong within the MSCI China All Shares fell -2.87% led by real estate -5.43%, financials -4.6%, materials -3.74%, discretionary -3.13%, energy -2.65% etc. Hong Kong’s most heavily traded by value were Tencent -1.65%, Ping An -5.78%, China Merchants Bank -9.38%, Sun Hung Kai Property -10.34%, AIA -4.94%, HK Exchanges -2.64%, Meituan -2.57%, Alibaba HK -2.19%, Xiaomi -0.87% and BYD -5.28%. Southbound Stock Connect was closed.

A-Share Update

Shanghai, Shenzhen, and the STAR Board were closed today.

Krane Funds Advisors, LLC is the investment manager for KraneShares ETFs. Our suite of China focused ETFs provide investors with solutions to capture China’s importance as an essential element of a well-designed investment portfolio. We strive to provide innovative, first to market strategies that have been developed based on our strong partnerships and our deep knowledge of investing. We help investors stay up to date on global market trends and aim to provide meaningful diversification. Krane Funds Advisors, LLC is majority owned by China International Capital Corporation (CICC).

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