• For the 2H21 to 24 Sep, China stock indices were among the least performing global benchmarks, with the FTSE China A50 Index declining 12% and HSCEI declining 18%. By comparison, the Singapore FTSE ST China Index has generated a 6% decline, with performances ranging from a 22% gain for China Everbright Water to a 29% decline for The Place Holdings. 
   
• Much China focus since 14 Sep has been on the future of China Evergrande, given the social toll of real estate defaults, the clear mandate of policymakers to rein in the debt of China Developers, and the potential systemic impacts to counterparties and adjacent industries. The stock has declined 77% in the 2H21 to 24 Sep.
   
• On 30 Sep, China Caixin PMIs will be in the spotlight following the sharp declines in Manufacturing and Services in August which coincided with the weekly confirmed new cases of COVID-19 in China reaching highs last seen in January 2021, and containment measures and mobility restrictions through China’s zero-COVID policy shutdowns.

Like much of the world, the China economy has seen a deceleration in economic growth over the past three months. In July, the IMF trimmed its growth estimate for China in 2021 from 8.4% to 8.1%, which has coincided with sequential weaker economic reports over the past 12 weeks. China will be in focus this week ahead of the week-long National Golden Week holiday from 1 Oct to 7 Oct. All eyes will be on President Xi’s National Day policy speech on 1 Oct that also marks the 72nd anniversary of the founding of the People’s Republic of China.

Since 30 June, China stock indices have been among the least performing global benchmarks over the 12 weeks, with the FTSE China A50 Index declining 12% and Hang Seng China Enterprises Index declining 18%. From the beginning of 2H21, China’s high frequency economic indicators have reduced the momentum displayed in 1H21. The Caixin Manufacturing PMI declined from 51.3 in June to 50.3 in July, then moved into contraction at 49.2 in August. During August, weekly confirmed new cases of COVID-19 in China reached above highs of more than 700 cases, last seen in January 2021. This also saw the Caixin Services PMI fall from 54.9 in July to 46.7 in August. In-line with the Caixin reports, China Retail Sales YoY growth has decelerated from 23.0% for the first six months of 2021, to 18.1% for the first eight months of 2021 with Industrial Production also decelerating from 15.9% for the first six months of 2021, to 13.1% for the first eight months of 2021.

While the weekly confirmed cases gauge had declined from above 700 cases in mid-August to near 170 cases by 9 Sep, it had returned to 490 cases on 18 Sep, then regressed to 329 on 25 Sep. While the number of cases may seem comparatively low, China’s bold zero-COVID policy approach that restrict mobility and contain economic activity was activated. At the same time, China has remarkably administered at least one dose of the COVID-19 vaccine to 1.1 billion people. Hence focus in the weeks ahead will firstly be on the Caixin PMIs for September, due 30 Sep, followed by any signs of China easing its strict COVID-19 containment measures. 

China Evergrande Group

Another factor recently attracted as much focus as the recent growth deceleration, is the outlook for China Evergrande Group and potential systemic ramifications of a potential default of the developer cum conglomerate. The modern day size and impact of China Evergrande Group is established by the Group ranking #122 in the Fortune Global 500 rankings for 2021 (ahead of Country Garden Holdings which ranked #139). The conglomerate reported its FY20 (ended 31 Dec) net profit was down 6% from FY19 at RMB 31 billion, however much market focus on the stock in 2020 was its increased debt and net gearing, in addition to cash flow concerns. Since 2012, market observers have noted that the Group’s major debt ratio indicators have note abated following on from its listing in 2009.

Key recent development include:

• Its 1HFY21 net profit was reported on 31 Aug to be down 29% YoY at RMB 10.5 billion, attributable to the decrease in delivered area and the nationwide sales promotion activities and sales price concessions of the Group which caused decreased sales price. At the same time its total liabilities had gradually increased from RMB 1.85 trillion at the end of FY19 to RMB 1.97 trillion in 1HFY21, with RMB 240 billion or 42.0% of its borrowings due within 12 months of 30 June 2021. The Group also noted that as of 30 June 2021, the average interest rate of borrowings was 9.02% per annum, down from 9.49% on 31 Dec 2020. 
• On 14 Sep, the Group announced it expected significant continuing decline in contract sales in the current month, thereby “resulting in the continuous deterioration of cash collection by the Group which would in turn place tremendous pressure on the Group’s cashflow and liquidity” and had engaged Financial Advisers. The following day, Lucror Analytics noted that the hiring Financial Advisors could be a precursor to a debt restructuring, and that the Group was is in talks with onshore banks and financial institutions, as well as retail investors on repayment options, while a restructuring plan with bondholders may be inevitable.
• Following one of the Group's subsidiaries filing an announcement in relation to an interest payment due on 23 Sep which indicated it had been resolved via negotiations off the clearing house, Lucror Analytics noted that the settlement of the onshore bond coupon indicates Evergrande is actively negotiating with investors, however, the company may not be able to meet its future payment obligations.

To assuage market uncertainty, China's central bank has been injecting liquidity into the financial system with reverse repos, while the People's Bank of China is also promoting reform of the operation mode of its standing lending facility, as part of efforts to better meet reasonable liquidity needs (click here for more).

Recent Market Impacts

Expectations for China Evergrande’s road ahead are varied, given the social toll of real estate defaults, the clear mandate of policymakers to rein in the debt of China Developers, and the potential impacts to counterparties and adjacent industries. This uncertainty, coupled the decelerating growth in 2H21, have seen the top quartile of China and Hong Kong real estate stocks by market value decline 10% over the past 12 weeks. Since the share price of China Evergrande closed below its March lows on 8 July through to 23 Sep, its share price has declined 76%. Over that period, key China benchmarks generated declines in total returns, with the H-share Index declining 12%, the FTSE China A50 Index declining 9% and the FTSE ST China Index declining 6%.

The risk of a disorderly default of China Evergrande have weighed both equities and corporate bond prices, particular the China property firms that have crossed the two or three of the three red line metrics introduced last year. The subsequent volatility in China credit USD bond prices have enabled both fund managers to capture higher yields, and investors capturing potentially higher distribution yields on the back of the lower prices. China high yield bonds account for more than 40% of the portfolio of the Bloomberg Asia USD High Yield Diversified Credit Index, which is the underlying index of the iShares USD Asia High Yield Bond ETF. The AUM of this ETF has grown from US$148 million at the end of 2020 to US$646 million. Click here for more details on the ETF.

Singapore Context & Market Moves

Of the 19 FTSE ST China Index constituents, the majority have generated declines over the 12 weeks, with China Everbright Water and Tianjin Zhongxin Pharma generating gains, alongside their respective global industry indices of Utilities and Healthcare Products.

• China Everbright Water is an environmental protection company focusing on water environment management that invested in and held 143 environmental protection projects, with a total investment of approximately RMB25.75 billion as of 30 Jun. On 11 Aug the Group reported its 1HFY21 (ended 30 Jun) revenue amounted to HK$3.11 billion, representing an increase of 47% from 1HFY20, with profit attributable to equity holders at HK$548.18 million, representing an increase of 36% from 1HFY20.
• Tianjin Zhong Xin Pharma reported on 13 August its 1HFY21 (ended 30 Jun) net profit gained 42% from 1HFY20. Among the many reforms introduced in China across 2021, one of the first for the year was the State Council of China issuing Several Policies and Measures on Accelerating the Characteristic Development of Traditional Chinese Medicine. 
• China Developer, Yanlord Land is also a part of the FTSE ST China Index, and has declined 5.1% since 8 July, with the bulk of that decline attributed to the 4.3% decline since 13 Sep. On Aug 12, Yanlord Land Group reported its 1HFY21 (ended June 30) revenue increased by 44.7% from 1HFY20 to 13.19 billion yuan (S$2.7 billion), primarily attributed to the increase in gross floor area delivered to customers, which partly offset by the decrease in average selling price per square metre achieved by the group in 1HFY21 compared to 1HFY20. With the results, founder, chairman and CEO Zhong Sheng Jia noted that given the backdrop of strong economic recovery across China during the reporting period, Yanlord's development strategy of focusing on building premium developments in high-growth economic regions and cities within the country had continued to deliver business growth. Mr Zhang also acquired 6,991,400 shares of the listed company at S$1.17 per share between 17 Aug and 19 Aug (click here for more). Since 30 June, Yanlord Land Group has declined 8.2%, with just over half those declines formed since 13 Sep, trimming its 2021 to 24 Sep total return to 5.3% based on the 6.8 cents per share dividend that went ex-div on 19 May. The stock has paid a 6.8 cents dividend per year since 2018, with the S$1.12 close on 24 Sep generating an indicative dividend yield of 6.1%.
• Ying Li International and Hongkong Land which are not are part of the FTSE ST China Index, with Hongkong Land more of a 50/50 Manager/Developer have declined 2.5% and 0.9% since 13 Sep. Notably, Hongkong Land rallied 4.1% on 23 Sep, following on from the China Evergrande Group subsidiary filing the announcement as discussed above. CapitaLand Investment which debuted on Monday, and conducts business in China rallied 4.3% on 23 Sep.
• Singapore banks make up more than 40% of the STI, and DBS and OCBC both maintain more net revenue exposure to Greater China, and more loan exposure to Mainland China than UOB. This coincided some marginal outperformance of UOB, over the latter two banks going back to session prior to China Evergrande Group’s 14 Sep announcement. The nine sessions saw UOB decline 0.7%, while DBS declined 3.1% and OCBC declined 2.2%. However, as reiterated by research analysts this week, while Singapore banks do not comment on specific exposures, the Singapore banks are not listed as principal bankers in the 2020 China Evergrande Annual Report.

 Source: Bloomberg, Refinitiv, SGX (Data as of 24 Sep 2021)