Aside from the jokes made in China, people who trade Chinese stocks know that you always need to be on your guard.
Sure, they can offer explosive growth potential, but there’s always a risk that the company will be lost to fraud (Luckin Coffee, anyone?)
To be fair, these threats are everywhere, not just in China. But the enormous authority of the Chinese government means raids can be quick and change the business landscape overnight. In addition, Chinese people suffer from relatively high fraud rates, which are common in developing countries.
The latest fiasco is the Evergrande Crisis, which has been on the news for several weeks. Even if you don’t dare to invest in Chinese stocks, chances are Evergrande could affect your other investments or even your life. * address ominous music *
What is China Evergrande Group?
Evergrande is a real estate developer in China that was founded in Guangzhou in 1996 and is now based in Shenzhen. It is not just any old real estate developer, but one of the largest in China, which ranks second in the PRC in terms of turnover.
The company currently owns over 1,300 projects spread across more than 280 Chinese cities. For comparison: Our own Capitaland, one of the largest real estate developers in Asia, only owns over 600 properties in over 160 cities worldwide.
In addition to real estate, the group also has investments in a number of diversified industries including electric vehicles, healthcare, finance and … pig farms. They have their own brand of bottled water, sponsored by Jackie Chan, and they also own a soccer team.
They even bought 50 percent of the Great Eastern Life Insurance Company in Singapore and renamed it Evergrande Life Assurance, though they are now considering selling it to raise funds.
Evergrande shares are listed on the Hong Kong Stock Exchange. Unsurprisingly, share prices are currently at five-year lows.
What is the Evergrande debt crisis?
Evergrande has been involved in some crazy big projects in the past few years, like building the world’s largest football stadium and a gigantic theme park with a fake island.
But all that glitz and glamor comes at a price, and Evergrande’s debt has swelled to the point of default. In fact, they won the title of the world’s most indebted developer for a whopping $ 304 billion.
This type of debt does not accumulate overnight. The company has had cash flow problems for a while. In order to raise money, Evergrande became the largest junk bond issuer in Asia. Junk bonds offer high interest rates, but they also carry a high risk of default. When a company releases junk bonds, it is usually a sign that it is in trouble and is desperate for cash.
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The world only became aware of this in July when news of an asset freeze in one of Evergrande’s divisions leaked. The freeze of assets is ordered by the court to prevent the company from evading its debtors by transferring its money or property.
Since then, life has been far from great for Evergrande due to a series of defaults and credit downgrades.
Fitch Ratings downgraded Evergrande from B to C while S&P Global Ratings downgraded it from B + to CC. Not only are those bad grades a Kiasu parent’s worst nightmare, but they’re also a real warning for investors – Fitch Rating C means there is a real possibility of default.
Evergrande’s shareholders are freaking out, of course, and the company’s stock prices have plummeted more than 80 percent.
So what now? The company has just announced that it will be privatized and taken off the stock exchange. Those poor, unfortunate shareholders who still hold onto Evergrande stock are paid a meager HKD 4.00 (SGD 0.70) for each canceled share, which is sad considering that Evergrande’s stock prices are most of the time 2018 and 2019 were over HKD 20.
Are Singapore banks involved?
When a company as large as Evergrande collapses, the impact can be huge as there are investors around the world who will be affected.
Additionally, lenders who have paid money to Evergrande run the risk of non-repayment. Even lenders who haven’t borrowed money directly from them could get into trouble. If Evergrande goes bankrupt, many other businesses will collapse and become insolvent, so just exposure to China and Hong Kong could be detrimental.
Some fear the Evergrande collapse could take on the proportions of Lehman Brothers and spark another global financial crisis. But some analysts believe it won’t be that bad. On the one hand, Evergrande, as a property developer, has properties that can be liquidated in the event of bankruptcy. In other words, the big lenders can still get their money back in the form of collateral property.
That being said, the Evergrande fiasco could be the sign of a deeper malaise plaguing the Chinese economy. Despite the government’s wealth narrative, the housing bubble and the abundance of empty homes and factories could be a warning of times to come.
Singapore’s three major local banks, DBS, OCBC and UOB, all operate in China and Hong Kong. Concerned that they might be affected if Evergrande collapses, MAS asked them about their revelation.
So far, DBS has said it has no involvement in Evergrande. However, 24 percent of DBS group assets, 28 percent of corporate loans and 22 percent of group profit before tax (PBT) come from Hong Kong and Greater China.
At OCBC, 16 percent of the Group’s assets come from Greater China, as well as 26 percent of the loans and 24 percent of the Group’s PBT.
Meanwhile, 16 percent of UOB’s corporate loans are attributable to Greater China, along with 10 percent of the PBT group.
What should Singaporean investors consider?
If you own bank stocks, you should check to see if the bank has exposure to Evergrande as well as Greater China and Hong Kong. These are risk factors that can cause your stock prices to fall if Evergrande falls.
For those with real estate stocks, you should definitely be keeping a close eye on the Evergrande saga, but that doesn’t necessarily mean it will negatively affect your stock values.
In fact, some analysts believe that Singapore developers can take advantage of Evergrande’s collapse in the long term by buying cheap real estate in China. The downside is that after the Evergrande collapse, the Chinese government could start regulating the real estate sector in China more tightly, which will have a negative impact on developers with Chinese projects.
More generally, if Evergrande collapses, you can expect Singapore and China / Hong Kong stock markets to take a hit, though analysts are divided on whether the spillover effects on Singapore will be severe. But this could also be a good time to get in and buy stocks at bargain prices.
This article was first published in MoneySmart.
