…There are signs that some large non-domestic asset management companies such as Blackrock and Allianz have lost significant sums in Country Garden.
… some suspicions that Chinese companies are being encouraged to raise funds internationally, even when their risk of default is high.
By Rebecca Ellis
SAT, SEPT 02 2023-theGBJournal |In 2021, news broke that one of China’s largest real estate developers had run into grave trouble, its extraordinary level of leverage pushing it rapidly towards insolvency.
Evergrande was one of China’s first domestically focused real estate companies whose bonds were widely owned by international investors.
In the intervening period, trading in the company’s stock has been halted as Evergrande negotiated a restructuring of its financial obligations.
In late August, the company once again began trading on the Hong Kong stock market, while applying for chapter 20 US bankruptcy protection.
This is a measure taken once a company has reached an agreement with its creditors overseas as well as home.
The company has fallen from its lofty heights and is now valued at HK$4.6 billion ($586 million) after hitting a peak of more than HK$420 billion ($5.3 billion) in 2017.
Previously, many felt that this was a Chinese only problem, and that its relevance to the rest of the world was minimal.
As we have learnt from other countries with an unregulated and excessively leveraged real estate sector, problems aren’t restricted to the sector alone.
The nature of real estate requires support of the financial and construction sectors, and as other problematic cases emerge, we have seen contagion risks have spread.
The timeline of events is as follows:
First half of 2022: Bloomberg reported here that 85% of Evergrande’s international debt had defaulted 10 August 2023: Country Garden, another of China’s private real estate companies, warned of a large net loss for the first six months of 2023 due to impairment on property projects and declining profit margins.
Mid-August 2023: Zhongzhi Enterprise Group, one of China’s largest private wealth managers, with over US$137 billion of assets under management, suspended payments on nearly all of its products.
Zhongrong International Trust Co. was the ninth largest trust company in China, with about 600 billion yuan ($83 billion) in assets under management and was part-owned by Zhongzhi.
On 14 August 2023, news reports flagged an increased contagion risk, because Zhongrong had missed scheduled repayments on some investment products.
This has triggered unprecedented withdrawals by international investors as reported by Reuters. $1.71 billion worth of mainland shares were sold by foreigners in May, almost three times April’s $659 million in withdrawals.
The problem is even more serious than initially thought, and as China’s relations with the west sink to an all-time low, there is an escalating risk that China vast reserves will not be deployed to bail out international investors.
There are some suspicions that Chinese companies are being encouraged to raise funds internationally, even when their risk of default is high.
There are signs that some large non-domestic asset management companies such as Blackrock and Allianz have lost significant sums in Country Garden.
BlackRock held $US351.9 million ($544 million) dollars in bonds, according to a filing dated August 11. Allianz’s position was $US301 million based on a June 30 filing. That was also when filings from others including Fidelity International and HSBC Holdings showed they were also holders.
Though these investments represent only basis points in the overall portfolios of Blackrock, Fidelity and company, and these firms are at practically zero risk of default, nonetheless their significant losses in Chinese real estate will dent those animal spirits which usually drive stock markets.
Along with stubborn inflation and the ongoing war in the Ukraine impacting access to staple goods across the world’s economies, this does not make a good combination.
Any deterioration could further destabilise the geo-political landscape, putting a sharper brake on investment. The signs are worrying, and markets are starting to realise that the hype of AI may not be sufficient to carry us through to a soft landing
We are always please to hear your thoughts and please do not hesitate to get in touch if you would like to chew the fat on this topic.
Rebecca Ellis, Family office advisor| www.aktspartners.ch
Co-author Martin de Sa Pinto, Martin de Sa Pinto Research
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