Upcoming Virtual Conference:
Join us tomorrow for a two-hour virtual conference for UK/European investors starting at 13:00 BST / 14:00 CET.
Policy, Performance, and the Two Sides to Reform in China
Click here to register.

Yesterday’s market action in Hong Kong was driven by the reality that four of the five largest Asia equity markets were closed (China, Japan, South Korea, and Taiwan)! Southbound Bound Stock Connect, the trading platform for Mainland investors to buy and sell Hong Kong-listed stocks, was also closed.

While Asia was on holiday, western media called central casting for the China bears. Nowhere was it mentioned how little liquidity was in Hong Kong. Hong Kong volumes yesterday (83% of the 1-year average) and today (70% of the 1-year average) were very low, likely leading to an exaggerated move. I expect tonight there will be numerous policy moves to calm Mainland investors in advance of Shanghai & Shenzhen reopening. Yes, the worst-case outcome is feasible but China’s financial regulators have had to deal with companies similar to Evergrande in the past. There is a playbook that very likely will be implemented.  

We have an active Asia Pac ex Japan High Yield US $ bond strategy sub-advised by Nikko Asset Management out of Singapore. The Nikko team provided several strong insights into a likely outcome for Evergrande though they do not hold their bonds. Chinese regulators have three options regarding Evergrande:

• Let the company default
• The government takes over the company
• The government facilitates/”encourages” a debt restructuring

The third option is the most likely as a default could have unintended consequences while the government doesn’t want to incentivize bad corporate behavior by bailing the company out. Evergrande’s bonds are pricing in a restructuring. It is difficult to ascertain where Evergrande equity will fall in a restructuring at this juncture.

There will be an incentive to allow Evergrande to continue working on current projects to allow suppliers to be paid. Everbright has innumerable contractors for its property developers such as construction companies, cement providers, steel, glass, etc. If Evergrande outright defaults on those obligations, it would have a significant downstream effect. Therefore, an outright default and liquidation of the company is unlikely. Yes, over 120 banks along with 121 non-bank institutions have exposure to Evergrande though it is worth noting that Evergrande represents approximately 0.1% of Chinese banks’ outstanding loans.

Key News

Asian equities were largely higher with India outperforming as Japan played catch up to the downside. China, South Korea, and Taiwan are still on holiday. Real estate was the best performing sector in Hong Kong overnight as real estate companies seek to distance themselves from Evergrande. We also had a bounce in banks and insurance companies that were hit yesterday. Hong Kong-listed internet stocks were off but not nearly as much as in the US yesterday. Tencent bought back another 230k shares. Clean tech had a nice bounce overnight.

H-Shares Update

The Hang Seng bounced around the room but managed to close +0.51% though the Hang Seng TECH was off -0.46%. Volumes were down -15.91% from yesterday which was just 70% of the 1-year average. The 210 Chinese companies listed in Hong Kong within the MSCI China All Shares were off -0.06% led by real estate +4.48%, utilities +2.02%, industrials +1.05%, and energy +0.78% while discretionary and communication were off -1.04% and -0.89%. Hong Kong’s most heavily traded by value were Tencent -0.92%, Ping An +2.43%, Meituan -1.71%, AIA +5.97%, Alibaba HK -1.85%, China Merchants Bank +0.26%, BYD -0.33%, HK Exchanges +1.17%, Xiaomi +1.32% and Sun Hung Kai Property +1.69%. Southbound Stock Connect was closed today.

A-Shares Update

Shanghai, Shenzhen, STAR Board, and Northbound Stock Connect were closed today.

Last Night’s Exchange Rates, Prices, & Yields

Mainland bond and currency exchanges were closed today.