Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

<ul>
<li>
Surprise Exchange Filing: In a surprise exchange filing, China Evergrande Group (3333.HK) [Evergrande] is planning to “actively engage” with offshore creditors on a restructuring plan; </li>
<li>
Ending Grace Period:Another Evergrande test comes on December 6, 2021, when the 30-day grace period ends on two USD bond coupon payments; and</li>
<li>
Kaisa Risk:Kaisa Group Holdings (1638.HK) faces a potential USD 400 mn default a day after the Evergrande payments are due. </li>
</ul>



Surprise Exchange Filing: In a surprise exchange filing, China Evergrande Group (3333.HK) [Evergrande] is planning to “actively engage” with offshore creditors on a restructuring plan; 

Ending Grace Period:Another Evergrande test comes on December 6, 2021, when the 30-day grace period ends on two USD bond coupon payments; and

Kaisa Risk:Kaisa Group Holdings (1638.HK) faces a potential USD 400 mn default a day after the Evergrande payments are due. 


Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<ul>
<li>Evergrande did a "Friday night drop" saying it might not be able to continue to perform its financial obligations. The Guangdong govt called Chairman Hui on the carpet. </li>
<li>The PBOC, CBIRC, and CSRC appear to have thrown Evergrande management under the bus with simultaneous statements that Evergrande's case is an individual one due to "reckless expansion."</li>
<li>$82.5mm of coupons are due today at midnight. There is a demand for performance of a a guarantee on a US$260mm bond. Push has come to shove. </li>
</ul>


Evergrande did a "Friday night drop" saying it might not be able to continue to perform its financial obligations. The Guangdong govt called Chairman Hui on the carpet. 
The PBOC, CBIRC, and CSRC appear to have thrown Evergrande management under the bus with simultaneous statements that Evergrande's case is an individual one due to "reckless expansion."
$82.5mm of coupons are due today at midnight. There is a demand for performance of a a guarantee on a US$260mm bond. Push has come to shove. 


The Evergrande Quantum Kitty Living Its Ninth Life

In <a href="https://www.smartkarma.com/insights/evergrande-as-a-study-of-quantum-mechanics-theory" target="_blank" data-smartkarma-citation="insights:55979" rel="noopener">Evergrande as a Study of Quantum Mechanics Theory</a> in August I discussed how the state of <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande (3333 HK)</a>'s existence was somehow not dissimilar to the classic cat-in-a-box problem mooted by early quantum physics theorists.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/237/678/original/catinabox3.jpeg?1635296450" class="editor-image img-responsive" data-smartkarma-image-id="237678"></figure>With coupon payments not being made, then being made at the last minute to avoid default, this quantum kitty has more life (or is using up its nine lives) than one might have thought. It is worth exploring.</section><h3>Evergrande Property Services Deal Broken - The Nuance</h3>Last week it became clear that <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande (3333 HK)</a> ("Evergrande") would end up NOT selling a controlling stake in <a href="https://www.smartkarma.com/entities/evergrande-property-services" target="_blank" data-smartkarma-citation="entities:30921:1" rel="noopener">Evergrande Property Services (6666 HK)</a> ("EPS") to <a href="https://www.smartkarma.com/entities/hopson-development-holdings" target="_blank" data-smartkarma-citation="entities:8108:1" rel="noopener">Hopson Development (754 HK)</a> ("Hopson"), but that was less clear that it appeared. Evergrande <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/1020/2021102000957.pdf" target="_blank" rel="noopener">said</a> Hopson had not fulfilled its obligations (with word being - getting the Guangzhou govt stamp of approval). Hopson's "<a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/1020/2021102000969.pdf" target="_blank" rel="noopener">clarification</a>" on the failure to settle the trade was nuanced quite differently. Evergrande had, according to Hopson, sought to change the terms of the deal, by asking for all the cash upfront before netting out the monies owned between Evergrande and its guarantors and EPS as the deal was originally laid out. The problem was that once the cash was paid out, it was not clear that Evergrande would pay to EPS the monies owed. The nuance here is that the "Cash and Short-Term Securities" at EPS may be in short-term securities issued by its parent. If the payment made to the parent (HK$20.04bn) nets out against HK$17bn possibly borrowed, that means that Evergrande only gets HK$3bn for 50.01%. It actually reduces debt, BUT getting that HK$3bn is less useful than getting HK$20bn. There is a HK$1bn break fee to the 'party which defaults' on the closure of the Sale of Target Company Shares. At this point, Evergrande is saying Hopson is at fault. Hopson has said it will go through with the transaction (and insists on doing so) at the terms agreed. Given the circumstances, I would expect this is now a HK$1bn payment to Hopson which will be owed but which could probably be marked to market at 20cts on the dollar. The other nuance one may derive from that little bust-up is that the shares in Evergrande Property Service - which are a crucial part of the value of the potential "estate" of Evergrande for the bondholders - may be worth a fair bit less than their traded value because if the netting could not occur, that means Evergrande Property Services may not control its significant net cash position. Evergrande and Hopson agreed at a price then below market based on the idea that the cash existed and Evergrande was good for it. The terms about timing would have been clear enough to Evergrande. Take that cash away and it is worth US$2bn less (which is a lot when the US$20bn of USD Evergrande debt is trading at 20cts on the dollar). That net cash position may be invested in Evergrande exposure, and if so, it may not be coming back out until Evergrande is fully healthy. Which may take awhile. But Hopson has stated its case. <h3>Coupons Paid and Unpaid - The Nuance</h3>The News we got last Friday and over the weekend was that the US$83.5mm of coupons which were in their grace period since the 23 September due date were paid to bondholders, apparently. While I had self-admittedly been up in the air about the likelihood they would pay, all reports suggest they have, and that means the company is in the clear until the 29th of October when more coupons run out their grace period. That would be ~US$47mm of coupons not paid on 29 September. There were other USD bond coupons unpaid recently - roughly US$148.13mm of coupons due on 11 October. Those would see their grace period expire on 10 November. There are another $82mm of coupons coming due on 6 November (where the grace period would be until 6 December) and another $255mm of coupons coming due on 28 December. But there is nuance here too. And timing. And that is better discussed in more detail below. <h3>The Discovery Phase of the Bezzle</h3>I used that phrase a bit more than a year ago when talking about Evergrande, suggesting that Galbraith's fabulously evocative word describing the cumulative increase in illusory/unrealised wealth and general excess marked by over-abundant trust and plentiful money on the way up - The Bezzle - was now in its discovery phase, where "Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous."  I can cherry pick quotes, and if I do, I'd note that section continues a bit, then says, "Just as the boom accelerated the rate of growth, so the crash enormously advanced the rate of discovery. Within a few days, something close to a universal trust turned into something akin to universal suspicion. Audits were ordered. Strained or preoccupied behavior was noticed."I'd say we are definitely there now.It's a great book, and well worth reading, and this particular section describes very clearly the increase of unrealised wealth under the curve - which separately Mr. Galbraith looked at as seeding wealth effect spending, something for which our favourite Belt Brother is known.<div class="content-highlight">What matters now is that there is pressure on those who profited from The Bezzle to unwind the gains to whence they came.</div>What struck many observers for many years was how impervious to the enormous risks born by Evergrande's capital providers and customers Founder Hui Ka Yan and his reputation seemed. That all seemed to end with a series of articles and posts on mainland media in July and August, culminating in this Caixin <a href="https://www.caixinglobal.com/2021-08-30/rich-friends-who-helped-evergrande-tycoon-count-their-losses-101763855.html" target="_blank" rel="noopener">article</a> at the end of August which talked quite explicitly about Hui Ka Yan's poker buddies supporting him and his investments (the next day, one of his poker buddies - Joseph Lau and his wife, now head of <a href="https://www.smartkarma.com/entities/chinese-estates-holdings-limited" target="_blank" data-smartkarma-citation="entities:20954:1" rel="noopener">Chinese Estates Holdings (127 HK)</a>, started selling shares), and <a href="https://www.caixinglobal.com/2021-09-22/caixin-explains-how-evergrandes-hui-ka-yan-blew-up-a-43-billion-fortune-101776376.html" target="_blank" rel="noopener">another article</a> perhaps 5 weeks ago which talked about Chairman Hui having blown up a US$43bn fortune.  Hui Ka Yan - also known by Xu Jiayin - has been on the Forbes China Philanthropy List for years, giving RMB 3bn in 2020, and RMB 3bn in 2019, RMB 4.1bn in 2018, and RMB 4.2bn in 2017, and he had topped the list in 2016 and 2015 as well (this year was his first year in several not in the top spot (taken by Jack Ma this year)). A Reuters <a href="https://www.reuters.com/world/china/china-evergrande-shares-set-slide-105-after-26-bln-deal-collapses-2021-10-21/" target="_blank" rel="noopener">article</a> last week suggested that Evergrande chairman Hui Ka Yan had agreed to put up money into a project which backed a private $260mm USD bond issued by Jumbo Fortune Enterprises, an offshore JV affiliated with Evergrande subsidiary Hengda Real Estate, but guaranteed by Evergrande itself, with the idea that doing so gave more comfort to bondholders that they could extend the maturity, and avoid triggering an Event of Default on Evergrande proper. The nuance is that if this was the case, Chairman Hui is putting up his own money to make sure that default is delayed. That changes things. <h2>The Newest News</h2>On Monday 25 October there were headlines that the NDRC had called a meeting of real estate developers with the notable common factor among them that they had issued offshore bonds. Today they reportedly asked the companies to "optimise their foreign debt structures and proactively prepare for repayment of both principal and interest" <a href="https://www.reuters.com/article/china-evergrande-debt-ndrc/chinese-regulators-meet-companies-over-foreign-debt-holdings-idUSB9N2R702G" target="_blank" rel="noopener">according to Reuters</a>. On 26 October, Modern Land <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/1026/2021102600163.pdf" target="_blank" rel="noopener">defaulted</a> on a USD bond, which was something of a surprise given the chairman and controlling shareholder Zhang Lei and company president Zhang Peng <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/1011/2021101100057.pdf" target="_blank" data-v-6b4d63ed="" rel="noopener">together offered to loan the company 800 million yuan</a> "within the next 2-3 months" on 11 October and a surprise given the NDRC meeting.And Bloomberg <a href="https://www.bloomberg.com/news/articles/2021-10-26/developer-s-payment-miss-signals-more-stress-evergrande-update" target="_blank" rel="noopener">reported</a> yesterday that the government had urged/ordered Chairman Hui Ka Yan to use his personal wealth to pay Evergrande's debt. While this is perhaps not surprising, especially as he is calculated to have taken out US$8bn in dividends in the past decade, it is indicative that "common prosperity" means rich people make sure those from whom they take money to become rich get what they are owed. There is nuance here too. And timing. More discussion of timing and nuance below the fold.

In Evergrande as a Study of Quantum Mechanics Theory in August I discussed how the state of Evergrande (3333 HK)'s existence was somehow not dissimilar to the classic cat-in-a-box problem mooted by early quantum physics theorists.With coupon payments not being made, then being made at the last minute to avoid default, this quantum kitty has more life (or is using up its nine lives) than one might have thought. It is worth exploring.Evergrande Property Services Deal Broken - The NuanceLast week it became clear that Evergrande (3333 HK) ("Evergrande") would end up NOT selling a controlling stake in Evergrande Property Services (6666 HK) ("EPS") to Hopson Development (754 HK) ("Hopson"), but that was less clear that it appeared. Evergrande said Hopson had not fulfilled its obligations (with word being - getting the Guangzhou govt stamp of approval). Hopson's "clarification" on the failure to settle the trade was nuanced quite differently. Evergrande had, according to Hopson, sought to change the terms of the deal, by asking for all the cash upfront before netting out the monies owned between Evergrande and its guarantors and EPS as the deal was originally laid out. The problem was that once the cash was paid out, it was not clear that Evergrande would pay to EPS the monies owed. The nuance here is that the "Cash and Short-Term Securities" at EPS may be in short-term securities issued by its parent. If the payment made to the parent (HK$20.04bn) nets out against HK$17bn possibly borrowed, that means that Evergrande only gets HK$3bn for 50.01%. It actually reduces debt, BUT getting that HK$3bn is less useful than getting HK$20bn. There is a HK$1bn break fee to the 'party which defaults' on the closure of the Sale of Target Company Shares. At this point, Evergrande is saying Hopson is at fault. Hopson has said it will go through with the transaction (and insists on doing so) at the terms agreed. Given the circumstances, I would expect this is now a HK$1bn payment to Hopson which will be owed but which could probably be marked to market at 20cts on the dollar. The other nuance one may derive from that little bust-up is that the shares in Evergrande Property Service - which are a crucial part of the value of the potential "estate" of Evergrande for the bondholders - may be worth a fair bit less than their traded value because if the netting could not occur, that means Evergrande Property Services may not control its significant net cash position. Evergrande and Hopson agreed at a price then below market based on the idea that the cash existed and Evergrande was good for it. The terms about timing would have been clear enough to Evergrande. Take that cash away and it is worth US$2bn less (which is a lot when the US$20bn of USD Evergrande debt is trading at 20cts on the dollar). That net cash position may be invested in Evergrande exposure, and if so, it may not be coming back out until Evergrande is fully healthy. Which may take awhile. But Hopson has stated its case. Coupons Paid and Unpaid - The NuanceThe News we got last Friday and over the weekend was that the US$83.5mm of coupons which were in their grace period since the 23 September due date were paid to bondholders, apparently. While I had self-admittedly been up in the air about the likelihood they would pay, all reports suggest they have, and that means the company is in the clear until the 29th of October when more coupons run out their grace period. That would be ~US$47mm of coupons not paid on 29 September. There were other USD bond coupons unpaid recently - roughly US$148.13mm of coupons due on 11 October. Those would see their grace period expire on 10 November. There are another $82mm of coupons coming due on 6 November (where the grace period would be until 6 December) and another $255mm of coupons coming due on 28 December. But there is nuance here too. And timing. And that is better discussed in more detail below. The Discovery Phase of the BezzleI used that phrase a bit more than a year ago when talking about Evergrande, suggesting that Galbraith's fabulously evocative word describing the cumulative increase in illusory/unrealised wealth and general excess marked by over-abundant trust and plentiful money on the way up - The Bezzle - was now in its discovery phase, where "Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous."  I can cherry pick quotes, and if I do, I'd note that section continues a bit, then says, "Just as the boom accelerated the rate of growth, so the crash enormously advanced the rate of discovery. Within a few days, something close to a universal trust turned into something akin to universal suspicion. Audits were ordered. Strained or preoccupied behavior was noticed."I'd say we are definitely there now.It's a great book, and well worth reading, and this particular section describes very clearly the increase of unrealised wealth under the curve - which separately Mr. Galbraith looked at as seeding wealth effect spending, something for which our favourite Belt Brother is known.What matters now is that there is pressure on those who profited from The Bezzle to unwind the gains to whence they came.What struck many observers for many years was how impervious to the enormous risks born by Evergrande's capital providers and customers Founder Hui Ka Yan and his reputation seemed. That all seemed to end with a series of articles and posts on mainland media in July and August, culminating in this Caixin article at the end of August which talked quite explicitly about Hui Ka Yan's poker buddies supporting him and his investments (the next day, one of his poker buddies - Joseph Lau and his wife, now head of Chinese Estates Holdings (127 HK), started selling shares), and another article perhaps 5 weeks ago which talked about Chairman Hui having blown up a US$43bn fortune.  Hui Ka Yan - also known by Xu Jiayin - has been on the Forbes China Philanthropy List for years, giving RMB 3bn in 2020, and RMB 3bn in 2019, RMB 4.1bn in 2018, and RMB 4.2bn in 2017, and he had topped the list in 2016 and 2015 as well (this year was his first year in several not in the top spot (taken by Jack Ma this year)). A Reuters article last week suggested that Evergrande chairman Hui Ka Yan had agreed to put up money into a project which backed a private $260mm USD bond issued by Jumbo Fortune Enterprises, an offshore JV affiliated with Evergrande subsidiary Hengda Real Estate, but guaranteed by Evergrande itself, with the idea that doing so gave more comfort to bondholders that they could extend the maturity, and avoid triggering an Event of Default on Evergrande proper. The nuance is that if this was the case, Chairman Hui is putting up his own money to make sure that default is delayed. That changes things. The Newest NewsOn Monday 25 October there were headlines that the NDRC had called a meeting of real estate developers with the notable common factor among them that they had issued offshore bonds. Today they reportedly asked the companies to "optimise their foreign debt structures and proactively prepare for repayment of both principal and interest" according to Reuters. On 26 October, Modern Land defaulted on a USD bond, which was something of a surprise given the chairman and controlling shareholder Zhang Lei and company president Zhang Peng together offered to loan the company 800 million yuan "within the next 2-3 months" on 11 October and a surprise given the NDRC meeting.And Bloomberg reported yesterday that the government had urged/ordered Chairman Hui Ka Yan to use his personal wealth to pay Evergrande's debt. While this is perhaps not surprising, especially as he is calculated to have taken out US$8bn in dividends in the past decade, it is indicative that "common prosperity" means rich people make sure those from whom they take money to become rich get what they are owed. There is nuance here too. And timing. More discussion of timing and nuance below the fold. 

Evergrande Bezzle Discovered - Quantum Kitty's Regenerative Capabilities Have Nuance and Timing

David Blennerhassett

There is nothing illegal about the sale of assets when a company is insolvent, or potentially insolvent. But any such sale must be at market value. Which is probably where negotiations between <a href="https://www.smartkarma.com/entities/hopson-development-holdings" target="_blank" data-smartkarma-citation="entities:8108:1" rel="noopener">Hopson Development (754 HK)</a> and <a href="https://www.smartkarma.com/entities/china-evergrande-group" target="_blank" data-smartkarma-citation="entities:479:1" rel="noopener">Evergrande (3333 HK)</a> came undone.
As discussed exhaustively both here at Smartkarma and in the media, Hopson is reportedly in talks to acquire a 51% stake in <a href="https://www.smartkarma.com/entities/evergrande-property-services" target="_blank" data-smartkarma-citation="entities:30921:1" rel="noopener">Evergrande Property Services (6666 HK)</a> from Evergrande. 
It was unclear whether the headline value of HK$40bn was for the 51% stake, or the valuation of the company as a whole. If for the whole company, that would have implied a 27.7% discount to last close, which might have upset Evergrande shareholders and bondholders alike. If it were HK$40bn for a 51% stake, that would be a considerably different outcome. Media reports noting the suspension of talks pointed at a HK$20bn number for the 51% stake. 
<a href="https://www.reuters.com/article/china-evergrande-debt-hopson-dev-hold/key-evergrande-deal-to-sell-stake-in-unit-put-on-hold-sources-idUSL4N2RF2DG" target="_blank" rel="noopener">Reportedly</a>, the Guangdong provincial government, which is effectively wearing a pre-administrator hat concerning Evergrande’s restructuring, has not approved the sale. 
In hindsight, this might be a good thing for Hopson. If Evergrande were to enter receivership/liquidation, and the receiver/liquidator deemed the stake sale in Evergrande Property Services was at a reduced value, it may make an application to the courts to unwind the transaction.
The other side of the coin, is why would Hopson potentially expose themselves to an unwind, or questionable business practice by acquiring assets on the cheap from a technically bankrupt or near-bankru entity? If a sale was reversed, does Hopson become a creditor and if so, is it subordinated to other creditors?
The 23 October marks the 30-day grace period on Evergrande's first missed payment before a default is officially declared. Evergrande also missed a second payment on September 29, and by media accounts, has been less than engaged with debtors on potential asset sales despite numerous requests.
And if Evergrande defaults, where does that leave Evergrande Property Services, whose business is almost exclusively reliant on the property services with its parent? And 65%-held <a href="https://www.smartkarma.com/entities/china-evergrande-new-energy-vehicle-group-ltd" target="_blank" data-smartkarma-citation="entities:713:1" rel="noopener">Evergrande Auto (708 HK)</a>, which has yet to manufacture an electric vehicle? And even 34.5%-held <a href="https://www.smartkarma.com/entities/shengjing-bank-co-ltd-h" target="_blank" data-smartkarma-citation="entities:96:1" rel="noopener">Shengjing Bank Co Ltd H (2066 HK)</a>?

There is nothing illegal about the sale of assets when a company is insolvent, or potentially insolvent. But any such sale must be at market value. Which is probably where negotiations between Hopson Development (754 HK) and Evergrande (3333 HK) came undone.
As discussed exhaustively both here at Smartkarma and in the media, Hopson is reportedly in talks to acquire a 51% stake in Evergrande Property Services (6666 HK) from Evergrande. 
It was unclear whether the headline value of HK$40bn was for the 51% stake, or the valuation of the company as a whole. If for the whole company, that would have implied a 27.7% discount to last close, which might have upset Evergrande shareholders and bondholders alike. If it were HK$40bn for a 51% stake, that would be a considerably different outcome. Media reports noting the suspension of talks pointed at a HK$20bn number for the 51% stake. 
Reportedly, the Guangdong provincial government, which is effectively wearing a pre-administrator hat concerning Evergrande’s restructuring, has not approved the sale. 
In hindsight, this might be a good thing for Hopson. If Evergrande were to enter receivership/liquidation, and the receiver/liquidator deemed the stake sale in Evergrande Property Services was at a reduced value, it may make an application to the courts to unwind the transaction.
The other side of the coin, is why would Hopson potentially expose themselves to an unwind, or questionable business practice by acquiring assets on the cheap from a technically bankrupt or near-bankru entity? If a sale was reversed, does Hopson become a creditor and if so, is it subordinated to other creditors?
The 23 October marks the 30-day grace period on Evergrande's first missed payment before a default is officially declared. Evergrande also missed a second payment on September 29, and by media accounts, has been less than engaged with debtors on potential asset sales despite numerous requests.
And if Evergrande defaults, where does that leave Evergrande Property Services, whose business is almost exclusively reliant on the property services with its parent? And 65%-held Evergrande Auto (708 HK), which has yet to manufacture an electric vehicle? And even 34.5%-held Shengjing Bank Co Ltd H (2066 HK)? 

Evergrande (3333 HK): Probably Hopson's Best Outcome

Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Macroeconomics

China's economy was virtually stagnant in September, and real GDP grew just 0.2% QoQ in 3Q 2021 as YoY growth slowed to 4.9% (from 7.9% in the previous quarter). Industrial output grew just 3.1% YoY and 0.1% MoM in September, while fixed asset investment (FAI), long the key driver of China's economic activity, declined 5.5% YoY in September 2021 (and fell 3.3% YoY in 3Q 2021). With rising political uncertainty, and heightened risk of expropriation of foreign bond-holders and successful local billionaires, real GDP is likely to contract QoQ in 4Q 2021, and grow just 3% YoY, as China's FAI finally declines after two decades of over-investment. 
With global trade volume slated to grow 10.8% in 2021 (twice the pace of global real GDP growth), China has one key remaining economic strength: like the rest of Asia, China's export sector remains robust. While imports too are growing (to feed import-intensive exports), slumping FAI will cause trade surpluses to widen in 4Q 2021. However, foreign reserves are likely to continue edging lower as capital flight accelerates. 
China's foreign reserves are down this year despite consistently large monthly trade surpluses -- and foreign reserves have been largely unchanged since 1Q 2016 despite large annual trade surpluses. In September 2021, net capital and services/income outflows were US$98 billion (the largest monthly outflow since capital controls were tightened in November 2016). In Jan-Sep 2021, net outflows have swelled to US$455 billion (much larger than the US$290 billion of net outflows in Jan-Sep 2020). If <a href="https://www.smartkarma.com/entities/evergrande-property-services" target="_blank" data-smartkarma-citation="entities:30921:1" rel="noopener">Evergrande Property Services (6666 HK)</a> or its affiliate defaults on its foreign bonds (while local bond holders were paid last month), the discriminatory treatment is likely to spur larger capital outflows, and a flight from Chinese foreign-currency paper. We recommend staying Underweight China.

China's economy was virtually stagnant in September, and real GDP grew just 0.2% QoQ in 3Q 2021 as YoY growth slowed to 4.9% (from 7.9% in the previous quarter). Industrial output grew just 3.1% YoY and 0.1% MoM in September, while fixed asset investment (FAI), long the key driver of China's economic activity, declined 5.5% YoY in September 2021 (and fell 3.3% YoY in 3Q 2021). With rising political uncertainty, and heightened risk of expropriation of foreign bond-holders and successful local billionaires, real GDP is likely to contract QoQ in 4Q 2021, and grow just 3% YoY, as China's FAI finally declines after two decades of over-investment. 
With global trade volume slated to grow 10.8% in 2021 (twice the pace of global real GDP growth), China has one key remaining economic strength: like the rest of Asia, China's export sector remains robust. While imports too are growing (to feed import-intensive exports), slumping FAI will cause trade surpluses to widen in 4Q 2021. However, foreign reserves are likely to continue edging lower as capital flight accelerates. 
China's foreign reserves are down this year despite consistently large monthly trade surpluses -- and foreign reserves have been largely unchanged since 1Q 2016 despite large annual trade surpluses. In September 2021, net capital and services/income outflows were US$98 billion (the largest monthly outflow since capital controls were tightened in November 2016). In Jan-Sep 2021, net outflows have swelled to US$455 billion (much larger than the US$290 billion of net outflows in Jan-Sep 2020). If Evergrande Property Services (6666 HK) or its affiliate defaults on its foreign bonds (while local bond holders were paid last month), the discriminatory treatment is likely to spur larger capital outflows, and a flight from Chinese foreign-currency paper. We recommend staying Underweight China.  

China: Succumbing to Excess Capacity in Industry and Real-Estate, & Capital Flight

China

Evergrande Property Services Group Limited operates as property management service providers. The Company provides property management services for high-end residential, theme parks, industrial parks, healthcare complexes, and other buildings. Evergrande Property Services Group offers services in China.

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Evergrande Property Services (6666 HK)

China Evergrande – Pre-Announcement?

EVERGRANDE: In an exchange filing, Evergrande is planning to “actively engage” with offshore creditors on a restructuring plan. A 30-day grace...

Thomas J. Monaco

The Evergrande Quantum Kitty Living Its Ninth Life

Evergrande filed a statement Friday saying debt repayment was a question mark. The Guangdong govt will send in a work group which is part of the...

Travis Lundy

Evergrande Bezzle Discovered - Quantum Kitty's Regenerative Capabilities Have Nuance and Timing

Evergrande as Quantum Kitty has more lives. Coupons have been paid to avoid default, and that suggests it could be months before an offshore EoD is...

Travis Lundy

Evergrande (3333 HK): Probably Hopson's Best Outcome

There is nothing illegal about the sale of assets when a company is insolvent. But any such sale must be at market value. This is probably where...

David Blennerhassett

China: Succumbing to Excess Capacity in Industry and Real-Estate, & Capital Flight

China's economy was stagnant in Sep21 as FAI contracted 5.5%YoY (-3.3% in 3Q). Real GDP will decelerate to 3%YoY in 4Q21. Capital flight will...

Prasenjit K. Basu

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