A Global Equity Trader’s Guide to China’s Evergrande Debt Crisis

This content was published on September 25, 2021 – 21:00

(Bloomberg) – The China Evergrande group debt crisis may not have been China’s “Lehman moment”, but it has had an impact on stocks linked to the developer and the world’s second-largest economy.

Creditors, investors and suppliers of the struggling firm and its peers are at the top of the impact list of traders. Next are companies with significant revenues from China, also in the limelight due to the ongoing regulatory crackdown in the country. Industrials stocks are a priority for US market watchers while those in Europe focus on miners.

Fears that an Evergrande collapse could trigger financial contagion and dampen growth in China’s economy rocked global markets on Monday. That anxiety eased after the developer agreed to settle some local interest payments, but the issue is far from over with holders of dollar bonds yet to receive a coupon due.

Here are some of the stocks and sectors in the sights of traders:

Property peers

The size of Evergrande, coupled with Beijing’s scrutiny of the real estate industry, will continue to have a significant impact on real estate developers. The company has around 2,000 billion yuan ($ 310 billion) in assets, equivalent to 2% of China’s gross domestic product, according to calculations by Goldman Sachs Group Inc., so any divestment could well disrupt the market.

Regardless of what happens to Evergrande, house prices in China are now at risk of a “significant drop,” according to Citigroup Inc ..

The Hang Seng real estate index fell to its lowest level in five years earlier this month. The 12-member gauge includes Country Garden Holdings Co., which has lost 25% since the end of March, and China Overseas Land & Investment Ltd., which has fallen 16%.

Lenders and investors

Shares of companies that have loaned money or invested in Chinese real estate companies will remain volatile as traders consider the potential for an increase in bad debts and asset write-downs.

While policymakers should lend their support, some banks could fall victim to it, Citigroup analysts, including Judy Zhang, wrote in a note on Wednesday.

Citi’s analysis of Chinese banks’ exposure to loans to high-risk promoters suggests credit risk is highest for China Minsheng Banking Corp., Ping An Bank Co., and China Everbright Bank Co. It sees Bank of Nanjing Co., Chongqing Rural Commercial Bank Co. and Postal Savings Bank of China Co. as less vulnerable.

Chinese Banks Minimize Risk After Evergrande Missed Payments

While Chinese insurers have addressed concerns about potential impairment losses, the enterprise value of the PICC Group would be most affected by listed insurance companies on the mainland in the worst-case scenario. This is followed by Ping An Insurance Group Co., according to Citi’s Michelle Ma in a note Thursday.

Asian suppliers

Suppliers of building materials and appliances for Evergrande’s projects will be scrutinized to assess how much the indebted real estate developer owes them and what its rise and fall may mean for recurring revenue.

Shares of Evergrande units such as Evergrande Property Services Group Ltd. – which have halved this year – and China Evergrande New Energy Vehicle Group Ltd. – which are down by more than 90% – also remain under surveillance.

American industrial products

Any restructuring that weighs on the world’s second-largest economy will have spillover effects on the most economically sensitive and globalized stocks in America. Industrial companies, often seen as the barometers of the health of the US economy, could be hit the hardest.

US industrial manufacturers have about 10% of sales exposure to China, according to estimates by JPMorgan Chase & Co. analyst Stephen Tusa. Stocks to watch include General Electric Co., Otis Worldwide Corp. and Honeywell International Inc., as well as heavy construction and equipment builder Caterpillar Inc.

European minors

In Europe, the Evergrande crisis is having repercussions on stocks of raw materials.

China accounts for 62% of BHP Group Plc. Revenue, 58% of Rio Tinto Plc and nearly half of Anglo American Plc and Glencore Plc, according to data compiled by Bloomberg. Cement companies like HeidelbergCement AG, as well as building suppliers like Kone OYJ and Schindler Holding AG, could be directly affected by the fallout from Evergrande, according to Liberum strategists.

© 2021 Bloomberg LP


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