Fears of a “moment” in China roiled global markets Monday. The question is what kind of moment this is.
Is it a Volcker moment, as Nomura’s Ting Lu suggested? Or is it more Lehman moment? Or maybe it’s a Minsky moment, because that makes for good headlines.
However you want to characterize it, consternation around China’s property crackdown and Evergrande’s date with some manner of restructuring, disorderly or otherwise, undercut sentiment at the beginning of a week that features a crucial Fed meeting.
Evergrande’s “tough and complicated” situation deteriorated rapidly last week. Reports that Beijing told lenders not to expect interest payments due this week underscored the imminent peril. Not that markets needed confirmation. The company’s bonds trade around 25 cents on the dollar and its shares are all but worthless. Its market cap touched the lowest ever in Hong Kong trading Monday (figure below).
The shares have fallen in 13 of the last 15 sessions, but that’s a meaningless statistic at this point. It’s over. Evergrande needs to pay nearly $84 million of interest on a five-year dollar bond Thursday, not to mention a 230 million yuan coupon.
Hong Kong shares were rattled further by reports that Beijing has instructed city property tycoons to fund or otherwise advance Xi’s interests, including and especially ameliorating a dearth of housing, or face the consequences. Whatever they may be. The developers were warned that “monopoly behavior” won’t be tolerated.
The Hang Seng dove more than 3% to the lowest in nearly a year, while the property gauge plunged to a half-decade nadir (figure below).
Monday’s decline summed to almost 7%. A trio of large developers fell double-digits.
Mainland markets were closed and holiday-thinned trading may have exacerbated the situation. Ping An Insurance slumped and something called Sinic Holdings sank almost 90% on anomalous volume before being halted (amusing figure below).
It’s a developer based in Shanghai. No reason was initially given for the trading halt, although it does have a bond due next month and its outlook was revised to negative last week by Fitch. Bloomberg tried to extract an explanation from the company but, apparently, “an officer at the firm’s Hong Kong office said there’s no one to attend to media inquires.” (Try not to laugh.)
And it just goes on and on. The Hong Kong dollar and the offshore yuan were affected, with the latter being one of the only proxies for China risk that will trade around the clock this week amid the holidays.
One regional PM summed it up in remarks to Bloomberg. “The price action across several asset classes in Asia today is horrendous,” he said.
Nothing serious will happen. between 1996 and 1999 we saw the Brazilian , Russian, Asian crises and indexes after the mandatory fall of 5-10% always surged and pushed higer. Fed will be more dovish, the Chinese slowdown will take off the pressure on commodities and energy prices, improving PPI/CPI. In short it will become the n-th excuse to march higher. For a US equity crash we need exhuberance, super optimism, and extreme price stretching
“For a US equity crash we need exuberance, super optimism, and extreme price stretching.” –What are your thoughts on the ~20% back to back returns on the S&P 500 in the middle of a global pandemic?
Maybe I didn’t explain myself well. What I mean is that we already saw in the past these crises coming from abroad, and in the end they were never able to break the main spx trend. The trend broke in 2007/2008 when US had its Lehman not someone else’s Lehman (like now Evergrande, and assuming it’s like Lehman, which I believe not). The other case is the 1999/2000 exhuberance . Spx/ndx aren’t in such exhuberance yet, issues like shortage and logistics had already damaged the spx under the surface, and the Wall Street bet crowd is not a force as it was last year, they probably had big losses somewhere (SPACs, IPOs turned sour, pinned indexes eating their calls making them useless burning theta etc). I believe FED will remain rather neutral, no tapering for now ( we ara data driven, yes inflation rose, but it’s temporary and we see signs of global cooling off). ECB basically said this already (read Schnabel, today and last week). The usual Faangm will report well, mild “bad” news from guidance for one or two of them due to logistics (I expect Amzn having trouble with it and maybe Aapl with an outlook on China not very rosy). So nothing serious on EPS, and CBs keeping liquidity. I see no crash coming. It will come, but in some months, after another pump higher. I’m obviously no fortune teller, just my opinion.
Well, Albert Edwards has to get a nod here (go reread “Market is Blind to Deflationary Impulse”) for prescience. The many who assumed that the government would “manage” its way through any “problem” also get a nod… just not the way they though about it.
As H has noted previously, the CCP is not concerned with imposing losses on market participants in the interest of serving policy. So how does Evergrande look relative to CCP policy objectives?
combating speculative excess and commodity price inflation …. check!
reducing overextended debt in property sector … check!
instill risk discipline in private economy and investor class… check!
combat the shift of power to private economy barons … check!
You couldn’t ask for a better crisis. It’s one of those situations where all you have to do to achieve your objectives is … nothing at all. And then declare victory at the end and take credit.
The difference between Evergrande and Lehman is that Lehman was a problem.