The Evergrande Effect, Hong Kong & The Move Toward Maoism In The PRC

— Keenan PWM Blog Post —

1) Will this be the Lehman Brothers of China and resultant contagion worldwide?

2) How does this effect the property sectors in Mainland China and Hong Kong?

3) What is the short term and long-term effect of the “Socialization” of China’s Industries?

1A) An answer to the first question includes that Evergrande is taking center stage while China’s markets are closed.

There is the possibility that the government has to bail them out in case of a free fall, but this week Evergrande’s defaulting payments are in Yuan, and therefore there is no spread to other currencies. This was a key element to the Asian contagion in the 90’s, which started with the Thai Baht spreading to all other Asian currencies. A wonderful narration of the Asian Crisis is provided with this videoclip, allowing for a better comprehension of the situation.

The 1997 Crisis: The Greatest Asian Crisis in History? – VisualPolitik EN –

However, they most likely are able to negotiate with their creditors. In fact, Ray Dalio underscores the way in which the Evergrande situation is “manageable,” as seen in this Bloomberg segment.

Ray Dalio Says Evergrande Crisis ‘Manageable’ –

2A) Since Evergrande is engaged with building in Mainland China away from the Hong Kong market, there will be a negligible effect on the developers such as Sung Hung Kai, which is the biggest developer in Hong Kong; Hong Kong real estate continues to be the most expensive in the world. When properties become available in Hong Kong, buyers are still waiting on line to purchase in a market that needs more housing to meet demand.

Of course, the issue of “One country, two systems” is a concern in Hong Kong, as Beijing interferes more and more on the unique freedoms of Hong Kong and its ability to do business freely. The effects so far have not affected business in general and the courts in Hong Kong. HSBC recently closed branches in the US and Europe and is firmly set to catch the inevitable growth in China with the realization it will have to adjust to the PRC’s regulations there. In fact, the head of HSBC does agree with the huge growth potential in China for the largest European bank with deep and long standing roots there.

There Is a Huge Opportunity in China, Says HSBC CEO –

The new Sedition law has jailed those who would dare to call Hong Kong independent from China and publish anti-Beijing literature.

3A) Finally, the issue of “socialization” of the system in Hong Kong and China is an effort to make the second biggest growth economy to be more of an even playing field.

One example of this is the new law that doesn’t allow tutoring companies, heretofore profit centers, to realize profit margins. This issue becomes more practical with the consideration that the average Chinese family spends 25% of their income on such tutoring services, a deep cut into an already limited budget. In fact, “children from grades 1-12 in 75% of Chinese families” adhere to using such tutoring services, rendering conspicuous how widespread these services are.

The idea that Xi Ji Ping is looking to turn China back to the Mao Tse Tung model is farfetched. Indeed, there have been an array of “crackdowns” on certain company behemoths in China- such as Didi, Alibaba, etc. However, even with the “tighter restrictions” and Xi’s wish to “further turn China into a Socialist state,” the developing market of China will not allow for too extreme of a control when it comes to the overall monetary flow.

The issue of housing is also on the table, but so far most companies that have been faced with new regulations have been complying, and it looks like in many cases, the market valuations to the downside have been overly inflated.

However, this does not mean more surprises aren’t coming: Xi is really on a mission to continue to grow China’s economy but with a more inclusive economy for more of China’s population.