Evergrande & Sunac Restructure With Country Garden On Deck

Week in Review

China’s better-than-expected economic release this week failed to lift markets as most Asian equity markets closed lower on the week.
The Biden Administration added to the types of semiconductors that US companies and those using US-developed technology are unable to export to China, though most global chipmakers reported that they expected a small impact from the expanded list and continue to see target China for future growth.
Buybacks continued to increase this week with 10 state-owned enterprises (SOEs) announcing new buybacks or increases in their buyback programs while internet giant Tencent has bought back nearly $4 billion worth of its own stock so far this year.
Electric vehicle giant BYD guided for its Q3 net income to nearly double.

Key News

Asian equities ended an off week lower as 10-Year US treasury yields temporarily rose above 5% during Asia trading hours following Powell’s press conference yesterday.

Markets are not climbing the wall of worry that seems to be getting higher as investors stay in risk-off mode. Shanghai and Shenzhen closed farther below my “lines in the sand” of 3,100 and 1,900, respectively. The markets closed at 2,983 and 1,810. This week’s price action puts Shenzhen close to the Ukraine invasion low in March of 2022.

The Loan Prime Rate (LPR) was not cut, as expected, though the market could have used the policy signal. However, it is important to note that banks do not have to track the LPR and many are already lowering mortgage and refinancing rates.

One clear issue for the Mainland market has been foreign investors selling via Northbound Stock Connect, which includes a relatively small $225 million worth of net selling today. For the week, we saw $4 billion worth of net selling, which is a drop in the pond considering the size of the market. The problem is that buyers are on the sideline and the stocks being sold are widely held and significant percentages of the indices. Regulators’ efforts to lift the mainland market by encouraging companies to pay dividends, increase stock buybacks, and limit IPOs, which limits supply, are being offset. The People’s Bank of China (PBOC) had a massive injection of liquidity into the financial system, but to no avail.

Evergrande reported that their bondholders had agreed to a restructuring. Meanwhile, Country Garden bondholders are reportedly meeting to discuss a restructuring after the company failed to pay a $15 million coupon payment. Remember that Sunac bondholders agreed to a restructuring already. What about China’s Lehman moment?

Real estate stocks in Hong Kong and Mainland China constituted one of the few bright spots today. In addition to yesterday’s report on Tier-1 cities seeing a modest September increase in prices, Shanghai will adjust the definition of first-time home buyer in another effort to stabilize property prices.

Hong Kong was lower as Mainland investors bought the dip via Southbound Stock Connect with a large net buy in the Hong Kong Tracker ETF. Hong Kong’s most heavily traded stocks by value were Tencent, which fell -0.76%, Meituan, which fell -2.36%, and Alibaba, which fell -0.82%, despite the early pre-buying for Singles Day, China’s Super Bowl of Spending.

There are several government meetings coming up, which could lead to more policy. Yes, China is limiting graphite exports following US chip import restrictions, but graphite seems an extremely mild way to retaliate. California Governor Newsom will visit China, which could be about planning a Biden-Xi summit in San Francisco next month. Global macroeconomic events are raining on our parade, like my weekend. The chance we see a policy adjustment announced over the weekend is not zero.

The Hang Seng and Hang Seng Tech indexes fell -0.72% and -1.03%, respectively, on volume that fell -9.23% from yesterday, which is 73% of the 1-year average. 172 stocks advanced while 301 declined. Main Board short turnover increased +6.53% from yesterday, which is 91% of the 1-year average, as 21% of turnover was short turnover (remember that Hong Kong short turnover includes ETF short volume, which is driven by market makers’ ETF hedging). The value factor outperformed (i.e., fell less than) the growth factor while small caps fell less than large caps. Real estate and materials were the only positive sectors, gaining +0.84% and +0.03%, respectively, while utilities fell -2.03%, technology fell -1.67%, and consumer discretionary fell -1.11%. The top-performing subsectors were household products, business services, and real estate. Meanwhile, technical hardware, healthcare equipment, and utilities were among the worst. Southbound Stock Connect volumes were light as Mainland investors bought a net $238 million worth of Hong Kong-listed stocks and ETFs as Meituan and SMIC saw moderate net buys while the Hong Kong Tracker ETF saw a moderate/small net outflow.

Shanghai, Shenzhen, and the STAR Board fell -0.74%, -0.96%, and -0.95%, respectively, on volume that fell -9.79% from yesterday, which is 83% of the 1-year average. 1,246 stocks advanced while 3,523 stocks declined. The value factor “outperformed” (i.e. fell less than) the growth factor while small caps “outperformed” (i.e. fell less than) large caps. Real estate and materials were the only positive sectors, up +0.53% and +0.19%, respectively, while communication services fell -2.56%, technology fell -1.9%, and healthcare fell -1.45%. The top-performing subsectors were power generation equipment, forestry, and real estate. Meanwhile, telecom, communication equipment, and software were among the worst-performing. Northbound Stock Connect volumes were moderate as foreign investors sold a net -$225 million worth of Mainland stocks. Cypc, Tianqi Lithium, and Foxconn were small net buys while CATL and Kweichow Moutai were moderate/small net sells and BYD was a small net sell.

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