Credit: REUTERS
Chinese property giant Evergrande is on the brink of collapse, and the potential fallout could have far-reaching implications that spill outside China’s borders.
After expanding rapidly for years and snapping up assets as China’s economy boomed, Evergrande is now snowed under a crushing debt of $300 billion. The world’s most indebted property developer has been scrambling to pay its suppliers, and warned investors twice in as many weeks that it could default on its debts. The Chinese developer is so huge that the fallout from a potential failure could hurt not only the Chinese economy, but spread to markets beyond. Its share price plunged nearly 80% so far this year, and trading of its bonds was repeatedly halted by Chinese stock exchanges in the past weeks.
What does Evergrande do?
Evergrande is everywhere. Its main business is in real estate, and it’s China’s second-largest property developer by sales. Evergrande owns more than 1,300 real estate projects in over 280 cities in China. Its property services management arm is involved in nearly 2,800 projects across more than 310 cities in China. The company has seven divisions dealing in a wide range of industries, including electric vehicles, health-care services, consumer products, video and television production units and even a theme park. Evergrande says it has 200,000 employees, but indirectly creates more than 3.8 million jobs every year, according to its website.
Evergrande’s shares and bonds are included in indexes across Asia and Evergrande's bond is held by many fund houses in their in Asian high yield bond funds.
Possible Outcome
It is probable that the Chinese government will intervene to prevent a hard landing as a result of the collapse of Evergrande. However, the government will probably let the company go under to set an example to other banks and property developers to prevent a moral hazard and to drive home the point that no Chinese companies are too big to fail. The most recent example is in 2019, when the Chinese government took over the distressed Baoshang bank and managed to avoid a liquidity crisis from arising. While the bank eventually declared bankruptcy, the government's Deposit Insurance Fund provided guarantees for personal deposits and institutional creditors' right, in an effort to maintain financial and social stability. It is possible that the government will intervene in the same manner for Evergrande to prevent a ripple effect, mitigate some of the damages done to the small investors. This will probably limit the damage within the Chinese economy and should not spread to other Asian economies.
Impact on our Portfolio
Based on my examination of the latest prospectus of the Asian funds we own, we currently have no exposure to Evergrande's stocks or bonds. My recent portfolio adjustment have minimized our exposure to Asian and Chinese equities. This will minimize any spillover from the collapse of Evergrande and keep any potential damage to our portfolio to the minimal. In the fixed income position, most of our bonds and cash are held in US denominated bonds which has no exposure to the China bond market. The main field of concern is with CPF-IS fixed income fund: Manulife Asia Pacific Investment Grade Bond A SGD, which consists of high quality bonds from Asia Pacific which consists of government bonds and bonds from large stable Asian companies such as Singtel and Lenovo Group. I do not foresee too much impact on this fund but warrants close monitoring just in case.
As much as our exposure to Evergrande is minimal, I will continue to keep a close watch on the development and pre-empt any potential impact on our portfolio and be nimble on adjusting the portfolio.
Rational of recent portfolio switch
No comments:
Post a Comment