The Storm Is Brewing, China Is Shaking

Beijing, wary of bailing out the country's most severely indebted property developer, has advised local officials to brace for a "possible storm".

  • The Wall Street Journal reported on Thursday that Chinese authorities have asked local governments to prepare for the probable demise of the debt-ridden Evergrande Group, citing officials involved with the conversations
  • According to the WSJ, local government agencies and state-owned companies have been told to intervene only at the last minute if Evergrande fails to manage its affairs in a timely manner
  • Local governments have been entrusted with avoiding unrest and minimising the rippling impact on house purchasers and the larger economy

Evergrande Stays Quiet

Evergrande, the Chinese property developer, has yet to confirm whether it would make interest payments on its US-dollar bond, a critical milestone that investors have been watching.

  • The $83 million interest payment was due on Thursday. It was for a $2 billion dollar-denominated bond that would mature in March 2022
  • The company had made no announcement or filed any documents with the Hong Kong exchange as of Friday morning, putting investors in the dark
  • The company will not technically default unless it fails to make the payment within 30 days, even if no payment is made on Thursday
  • According to Refinitiv Eikon data, the troubled real estate developer has another coupon payment due next Wednesday — a 7-year US dollar-denominated bond maturing in March 2024

BENCHMARK'S TAKE

  • Evergrande's failure might trigger a broader market slowdown in China as consumers are left without a home and the collapse of one property developer triggers a chain of bankruptcies
  • We doubt the Chinese government will step in as it seeks to curb asset prices and debt levels
  • This might trigger a country-wide slowdown which might negatively affect commodity prices as real estate projects are put on hold
  • With stocks near all time-highs, a more difficult recovery ahead and China's woes we expect a near-term pullback into richly valued assets. We therefore keep a large portion of our portfolio in cash
Portfolio
We have invested in over 45 stocks throughout North America, Latin America, Europe and Asia. Typically, we target fast-growing companies (U.S. and global) with a market cap between $ 1B and $ 100B.

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

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