The possibility of China property company Evergrande collapsing and overall worries about China's crackdown on indebted firms is taking its toll on Hong Kong shares. The Hang Seng Index
(HSI) is down more than 3% with China and Japan closed for a holiday. The benchmark index hit an 11-month low earlier, with the index tracking construction and property off more than 6%. Evergrande
(OTCPK:EGRNF) (OTCPK:EGRNY) is down more than 11% today and has fallen more than 80% this year as it struggles to meet debt payments. The company has more than $300M in debt and has warned about default. It has an $83.5M interest payment due on Thursday for a March 2022 bond, according to Reuters.
Domino effect: A collapse of Evergrande would have a domino effect on other China and Hong Kong property developers and a systemic effect on the rest of the economy, according to Jenny Zeng, co-head of Asia fixed income at AllianceBernstein.
"In the offshore dollar market, there is a considerable large portion of developers (who) are implied to be highly distressed," Zeng said on CNBC. Developers "can't survive much longer" if the refinancing channel continues to be shut. But she played down the possibility of Evergrande being akin to the collapse of Lehman Bros., noting the fragmentation of the China property market.
"Despite Evergrande's size, we all know it is the largest developer in China, probably the largest in the world, (the company) still accounts for only 4% and now it's even less of the total annual sales market," Zeng says. "The debt, particularly the onshore debt, is well collateralized."
Regulatory crackdown: Along with Evergrande, pressure is on the Hong Kong market as China's leaders look to rein in what it calls monopoly behavior, much like it has taken aim at the tech sector. But also like the moves against big tech companies, the exact actions the government will take are unclear. It is part of President Xi Jinping's "common prosperity" plan to address inequality.
"People may be worried about whether they have to take up extra responsibility to build more subsidized housing," Philip Tse, head of Hong Kong and China property research at BOCOM International, says, according to Bloomberg. "Foreign investors will be concerned if administrative matters in China will lead to a price cap, more stringent purchasing limits, or some tax-payment proof is required in order to pay for buying a flat."
"The price action across several asset classes in Asia today is horrendous due to rising fears over Evergrande and a few other issues, but it could be an overreaction due to all of the market closures in the region," Brian Quartarolo, portfolio manager at Pilgrim Partners Asia, says. (
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