Evergrande, Alibaba Meltdowns Exemplify China’s Engineered Crisis

Another day, another selloff in Chinese tech shares.

The Hang Seng Tech Index dove more than 3% to start the new week, a testament to all manner of concerns from the prospect of forced delistings in the US to regulatory woes at home.

Dual-listings are likely to remain under pressure in the near-term. Officials in both Washington and Beijing appear increasingly averse to Chinese companies trading on US exchanges.

Read more: ‘I Quit. No, You’re Fired.’

Some US lawmakers are keen to cut off the flow of US investor capital to China, ostensibly on national security concerns, while the Didi debacle showed just how worried China is about protecting troves of valuable data possessed by homegrown tech firms.

Monday’s rout took the Hong Kong tech gauge to a new “since launch” low.

The selloff illustrated in the figure (above) equates to around $1.5 trillion in market cap.

Alibaba simply can’t catch a break. Or a bid. The shares plunged a fifth session in Hong Kong Monday, as traders continued to fret over various kinds of regulatory scrutiny. The stock is down 50% in 2021.

The figure (above) is poignant indeed. Just call it “Icarus.”

The ADRs trade at ~18X, the cheapest ever, after a relentless 13-month selloff wiped away more than a half-trillion in value. As Bloomberg’s Sofia Horta e Costa wrote late last week, many of the company’s key growth drivers are at risk as Beijing targets fintech, data, online ads and content.

US institutional investors who can’t buy Chinese stocks off US exchanges own some 5% of the company’s shares, according to Goldman. Assuming US funds were compelled to liquidate positions in Chinese ADRs, Alibaba would suffer 58 days of selling.

Analysts can’t keep up. The average price target for Alibaba fell 18 straight weeks through the end of last month (figure above).

Meanwhile, Evergrande plummeted 20% Monday (figure below) after telegraphing a possibly imminent restructuring. For two months, the beleaguered developer managed to make coupon payments within 30-day grace periods, thereby averting cross-default triggers. But in a filing late last week, the group suggested the end is near.

“In light of the current liquidity status of the Group, there is no guarantee that the Group will have sufficient funds to continue to perform its financial obligations,” it said, adding that it “plans to actively engage with offshore creditors to formulate a viable restructuring plan of the Company’s offshore indebtedness for the benefit of all stakeholders.”

There was some good news, though. Later, Bloomberg cited the ubiquitous people familiar with the matter in reporting that Evergrande intends to include “all offshore public bonds and private debt obligations” in any restructuring.

That should alleviate some concerns, although it certainly doesn’t exorcise the contagion demon from the market.

Note that much of the drama unfolding in China is engineered — a self-inflicted wound. Beijing believes it’ll all work out for the best in the long run. In the near-term, though, it’s somewhat painful to observe.

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4 thoughts on “Evergrande, Alibaba Meltdowns Exemplify China’s Engineered Crisis

  1. Autocrats don’t have very good historical economic performance at the point when reality contradicts the national propagandist storyline. I’m sure this applies to democracies, but they seem better equipped to correct course. Humans seem to have a natural inclination to deny reality in favor of a good yarn.

    1. The concern should be how Autocrats generally respond to reality contradicting propaganda, they usually find an other to blame and malign for what contradicts their predictions. Who will be China’s other and how will they respond to the anger against that other? Invading Taiwan?

  2. The Chinese economy has performed better than any economy in the world over the last thirty years. Is that due to globalization and a huge demographic surge of young people, or a function of Chinese autocrats being willing and able to manage the Chinese economy better than the capitalists of the West were able to manage theirs? I guess we’re about to find out.

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