Finance Monthly - October 2021

44 Finance Monthly. Bus i ne s s & Economy The Catalyst After this long introduction, we can return to present-day events. By summer 2021, it was evident that residential home sales were slowing, with the highest drop happening in August - a -20% drop in value sold YoY. That’s huge for every developer in the market, and for Evergrande — which was levered up to the gills, it was the last nail in the coffin. That’s why around the start of September, strapped for cash, the firm stopped payments in its wealth management program. Truth is that the problem could’ve been seen even before, around the end of August, when the yield on the Evergrande bonds exploded to the upside. What was the government’s immediate reaction? With Evergrande’s $320 billion of debt outstanding and fearing contagion across the whole financial sector, the CCP injected $14 billion in the banking system via reverse repurchase agreements. Although if the stress continues, much more stimulus will be necessary. Contagion risk — real or overblown? Now that we mentioned the word everyone fears, let’s explore the current market environment and see if there’s really a cause for panic. In the Bloomberg Asia ex-Japan HY index, the top 10 constituents are all Chinese companies and out of them, only the real estate companies are experiencing a rising yield. That being said, this index is highly real estate heavy — 66%. So for the moment, a contagion is apparent. Though it’s only across the real estate sector. We are not preaching that “there’s nothing to see here” or “everything’s perfectly fine”, but we need to be very clear about the type of contagion that’s being observed. For the moment the problem is primarily in the real estate companies - on Monday 21 September, yields went up, while a lot of the financials’ stocks went down in the Hong Kong trading session. Evergrande has a large bond payment outstanding on Thursday 23 September and if they BLOOMBERG ASIA EX - JAPAN USD CREDIT CHINAHY Group by Industry (BICS) as of 09/17/2021 ISIN Members Par Val MV (USD) Weight Real Estate 235 104,020,426 82,861,554 66,11575 Industrial Other 34 8,800,000 9,031,779 7,20651 Financial Services 22 6,177,760 6,194,692 4,94278 Banks 4 3,700,000 3,997,245 3,18943 Travel & Lodging 6 3,450,000 3,600,874 2,87316 Metals & Mining 6 2,350,000 2,463,868 1,96594 Utilities 5 2,250,000 2,332,506 1,86112 Hardware 2 1,686,779 1,893,279 1,51066 Transport & Logistics 4 1,550,000 1,508,672 1,20378 Coal Operatives 3 1,400,000 1,445,617 1,15347 Retail - Consumer Discretionary 4 1,131,686 1,145,361 0.91389 Home Improvement 1 1,000,000 1,037,988 0.82822 Oil & Gas Services & Equipment 4 1,057,572 1,024,243 0.81725 Commercial Finance 3 900,000 877,979 0.70054 Chemicals 2 800,000 805,253 0.64252 Department Stores 2 720,000 738,112 0.58894 Source: Bloomberg