**Disclaimer: Everything posted here is for infomational purposes only and do not constitue any investment recommendations.**

Quick recap of the Evergrande saga
(Everyone would have known this incident)

Who is Evergrande:

China’s number 2 real estate developer Evergrande, which is also number 122 in the Fortune Global 500 list has racked up 1.95 trillion in debt.

Trigger Point:

1^st - GuangFa Bank (廣發銀行) froze Evergrande’s deposits of 132 million RMB.

2^nd - Hang Seng Bank (恆生銀行) and Bank of East Asia (東亞銀行) suspended new mortgages for 2 new projects in Hong Kong.
 

Significance:

As Evergrande started to default its bond, investors are losing confidence in China’s high yield bond market.

KraneShares Asia Pacific High Yield Bond ETF (KHYB:PCQ:USD) is just inches away from the Covid lows back in March 2020. If this continues, the whole high yield market especially for cash-strapped China real estate developers will collapse.

At this point, you must be thinking how this can impact our local markets.

Remember earlier this year, everyone is talking about how local steel companies are being benefitted from the expansion and recovery in China’s economy post Covid. Things are quite worrying now.

China’s retail sales shrank more than expected in August 2021, only up 2.5% YoY from August 2020. This means that despite China’s output level has returned to pre-Covid levels, but consumers are not able to take in all the supply and unwilling to spend as how they would previously.

This is something you should pay attention to if your invested companies have a meaningful business operations exposure in China.

The steel industry:

The real estate industry highly correlates with the steel industry as it serves as a necessity for building materials.

China’s daily steel production has decreased significantly as depicted above due to output cuts by the government. However, the price uptick might be limited due to easing of iron ore prices and impact from slowing property market. By mid September, the recovery of infrastructure construction has remained milder than a year earlier, some steel traders said. 

The ripple effects are well observed in related:

Let’s first take a look at miners.

Rio Tinto. World’s second largest mining corporation.

Fortescue Metals Group
 

BHP Billiton

And now steel companies

United States Steel Corporation

Nuecor Corporation

ArcelorMittal

In short, steel companies are not in a major downtrend per se, but they are definitely showing cracks in their charts and not trending as strong as few months ago.

In terms of the Malaysian peers, there are not much clues to be seen for now but definitely interesting to see developments in the next few weeks.

Hope everyone liked the short report above.

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