For a few weeks, it appeared as though Chinese equities might serve as a storm shelter amid an oncoming economic “hurricane” in advanced economies.
The idea, generally speaking, was that most of the headwinds that bedeviled mainland and city shares were set to abate, and very much contrary to central banks in developed markets, the PBoC would be inclined to easier policy in an effort to help the Party hit this year’s growth target after lockdowns undercut economic momentum in the second quarter.
It was a good story. Or, actually, it wasn’t. It was wishful thinking, and it ignored the cold, hard reality of investing in China — namely that everything depends on Xi, which in this case means his strict adherence to “COVID zero” and the Party’s appraisal of progress made towards rectifying various excesses associated with the country’s homegrown tech giants. The “fundamentals” only matter in that context. There’s a sense in which Xi is, himself, the fundamentals. Scarcely anyone, I wrote on Monday, accepts that reality.
Fast forward to Friday and Chinese equities suffered one of their worst weeks of 2022 (figure below).
Friday’s decline (-1.7%) probably would’ve been worse were it not for the “bad news is good news” narrative that says Q2’s lackluster growth data argues for more PBoC easing.
Although activity data for June suggested the world’s second largest economy perked up last month, the threat of renewed lockdowns is real indeed, and the mortgage boycott looks poised to become a serious problem.
Read more: Chinese Economy Flatlines, Further Imperiling Full-Year Target
The CSI 300 Banks Index fell nearly 8% this week, the worst showing since 2015, when mainland equities suffered a historic meltdown. The malaise is directly related to the growing boycott, which spanned nearly 90 cities as of Thursday.
Going forward, it’ll be more difficult to track the prevalence of deliberately delinquent borrowers. “China is censoring crowd-sourced documents tallying the number of mortgage boycotts, potentially hampering a key source of data for global investors and researchers tracking the property crisis,” Bloomberg reported on Friday.
So far, Chinese banks have disclosed around 2 billion yuan of at-risk loans (figure above). Tellingly, China Construction Bank, the biggest mortgage lender, hasn’t yet released any numbers, saying only that the risks are “controllable.”
According to the same linked Bloomberg piece, China is removing homebuyers’ social media accounts and deleting screenshots of charts. Some buyers, who spoke on the condition of anonymity, “were contacted by police.”
Meanwhile, Hong Kong shares had their worst week since the onset of the pandemic (figure below).
The Hang Seng Tech gauge, the poster child for Xi’s crackdown on platform companies, fell almost 8%.
It won’t surprise you to learn that regulatory concerns were a contributing factor. According to the Wall Street Journal, Alibaba executives were summoned to Shanghai for a chat with authorities. Earlier this month, it was disclosed that hackers absconded with personal data on an untold number of Chinese citizens after breaking into a database managed by police and hosted on Alibaba’s cloud platform.
The fresh blow to tech sentiment came days after China’s State Administration for Market Regulation hit Alibaba and Tencent with new fines tied to improper reporting of past deals.
Although you could argue the cybersecurity breach isn’t related to the tech crackdown, it’s nevertheless a headache, and the mortgage boycott is yet another reminder that despite efforts to clean up the property sector, years of questionable practices (in this case selling scores of homes before they’re built) sowed the seeds for a crisis in the event of a shock. The same dynamic was observable at various intervals in China’s labyrinthine shadow banking complex, where a mind-boggling array of cross holdings made it impossible to map potential contagion during a yearslong deleveraging campaign.
All in all, let this week be a reminder: If you’re inclined to view Chinese equities, mainland or city shares, as a potentially uncorrelated “hedge” at a time of extreme uncertainty in developed markets, know your risks. Because they’re myriad and, like COVID, endemic.
