The potential risks & ramifications of the demise of Evergrande

Yesterday, China Evergrande Group received a liquidation order from a Hong Kong court, which was no major surprise when we consider the company’s share price over recent years. China’s property crisis continues to unfold, although a market nadir is often plumbed on headline bad news. The collapse of this previous poster child is by far the largest failure in the world’s 2nd largest economy’s property market, which has witnessed several defaults by developers, aka a falling pack of cards. In the short term, the move by Judge Linda Chan is likely to see some asset sales in a property market lacking liquidity and confidence; the world will be watching closely.

• We believe Xi Jinping et al. will be considering intervention in the property market, a great opportunity to play the good guy while performing a useful, almost critical role.
• We believe the demise of China Evergrande was almost inevitable, even if it had a $275mn valuation before the announcement.

This is not the first wind-up order of a Chinese property developer. However, it is the largest, and the market’s muted reaction yesterday suggests that nobody was overly surprised by the outcome, although the timing may have caught some off-guard. The move has many suggesting the country’s property tailspin has further to play out, but we remind subscribers that stocks bottom well ahead of the fundamentals.

China’s property market has been in decline since 2020, and although it may be ready to end the decline and consolidate these losses, there’s no obvious catalyst to expect a “V shape” recovery. More than 50 Chinese real-estate developers have defaulted or missed payments over the last three years, illustrating how entrenched the issues are.

• We believe the Chinese property market is ready to “look for a low”, but there are no signs of a recovery just yet.

In terms of Evergrande’s demise, the ASX is set to be most influenced in terms of China’s demand for Australian exports as opposed to creditors, i.e. good old commodity prices. We should also remember that while the property crisis is the biggest threat to the world 2^nd largest economy, it’s also dealing with weak consumer confidence, high unemployment, and high local debt – if Beijing can engineer the stabilisation or recovery in their property market, the knock-on impact will be very positive especially when we consider Chinese and Hong Kong stocks have lost ~$US9 trillion in value since they peaked in 2021.

Today, we have updated our view on four stocks at the pointy end of Chinese demand for Australian commodities. Our view always remains fluid, and we know from our Q&A report news such as that from Evergrande can often unsettle some shareholders.