2024-01-31 13:33:09
The Chinese stock market has lost $6,000 billion in three years according to data published by Bloomberg. Unprecedented for this country which is also struggling to emerge from the real estate crisis and must face the liquidation of the Evergrande empire pronounced on Monday.
Is the China house burning? Beijing has, in any case, more than one fire to control on the economic front. The authorities are striving to save the furniture of the fallen real estate emperor Evergrande, while seeking to curb a historic collapse of its financial markets. All once morest a backdrop of economic indicators which continue to disappoint.
The media spotlight is mainly focused on Evergrande. On Monday January 29, the Hong Kong justice system ordered the liquidation of the developer, who symbolizes the setbacks of the Chinese real estate sector. “Enough is enough,” ruled Judge Linda Chan, specifying that Evergrande had failed to present a reasonable rescue plan despite multiple deadlines having been granted to it over the past two years.
Evergrande, the end or the return?
“This is the final act of the collapse saga, but there will be a sequel,” underlines Alexandre Baradez, financial analyst for the broker IG France. From now on the chapter of the distribution of the crumbs of this empire opens. Which Evergrande assets can still be saved by the takeover of another group? How can we reimburse foreign investors who have bet for years on the Chinese real estate sector, without harming citizens who have invested in Evergrande’s unfinished real estate projects?
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We will also have to take into account the twists and turns linked to the specificities of relations between Beijing and Hong Kong. The justice system of the semi-autonomous territory has complete freedom to seize Evergrande’s assets abroad, but “90% of the assets are in mainland China, and to have access to them is another story”, specifies Xin Sun, a specialist in Chinese economics at King’s College London. Chinese justice must indeed validate the decision of a Hong Kong court to close Evergrande so that liquidators can seize assets located on mainland Chinese soil.
Three years of stock market hell
China also fears that the liquidation of Evergrande will weigh on the stock market and further worry investors regarding the real solidity of large listed groups. Soon following the court ruling, all three major financial centers – Shenzhen, Shanghai and Hong Kong – posted losses.
But the situation has recovered and “other real estate values do not seem to have been much affected by this decision, which means that the reality of Evergrande’s bankruptcy had already been largely integrated by the stock markets”, believes Xin Sun .
This is (very) rare good news for the Chinese regime. Because if the general public mainly follows the twists and turns of the Evergrande soap opera, the authorities, for their part, have their eyes more and more fixed on the health of the stock market. Indeed, “in my lifetime, I have never experienced such a degraded stock market context in China,” assures Xin Sun, who compares the current situation to the followingmath of the 2008 global financial crisis.
For three years, the Chinese stock market has continued to take a nosedive. It lost $6,000 billion over this period, Bloomberg calculated. And the situation is not getting better. Shares of “tech companies have lost 80% of their value since 2021, which means that China has experienced the equivalent of the bursting of the Internet bubble in the United States in the early 2000s”, underlines Alexandre Baradez.
This year has not started better: the CSI 300 – the main Chinese stock index – has already lost 5%, since the 1is January.
Great exodus of foreign investors
This descent into hell risks having consequences on the income of the Chinese. “There are many more small carriers [essentiellement des particuliers dont la finance n’est pas le métier, NDLR] active in the Chinese financial markets than in the United States and Europe”, assures Xin Sun. The value of their portfolio has thus collapsed, and as real estate is in the midst of a crisis, they cannot bet on stone as an alternative investment.
Not to mention the indirect effects on the economic health of businesses. They are finding it increasingly difficult to raise money on the markets, limiting their resources to be able to hire or simply to avoid having to lay off workers.
These are also the causes of this stock market slump which worry the government, because they illustrate the fragilities of the Chinese economy in general. One of the main reasons is the great exodus of foreign investors. By the end of 2023, for example, they had resold more than 80% of the assets they had acquired previously that same year. “Investors are increasingly aware that current economic problems are not only cyclical but reflect structural dysfunctions,” summarizes Xin Sun.
It all started in 2021, when the world was still living in the time of Covid-19. “There was a regulatory tightening in several economic sectors, such as online education, video games, then it was the group CEOs who began to ‘disappear’. The market began to be worried, this which has awakened the risk aversion of foreign investors”, explains Alexandre Baradez.
The Evergrande earthquake, which occurred that same year, fueled this concern, which was then increased tenfold by geopolitical factors. “The Sino-Russian rapprochement, for example, is frowned upon by some foreign investors, who fear that Beijing will thus expose itself to economic sanctions from the United States,” notes Alexandre Baradez.
“We must realize that Chinese economic dynamism is largely based on foreign investments,” underlines the IG France analyst. This exodus upsets Beijing all the more as foreign money continues to flow into Asia… but into India and Japan. In other words, it is China’s economic rivals who are taking advantage of the situation.
A political choice
In addition, Beijing has not been able to find an alternative because the rebound in internal consumption, expected following the end of health restrictions linked to Covid-19, is still awaited. “A large part of the middle class has accumulated significant debts, notably property loans, which must continue to be repaid while their standard of living stagnates at best. As for young people, between 20 and 30% “among them don’t have a job. It’s not a context that encourages consumption,” analyzes Xin Sun.
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Faced with this situation, the authorities seemed to take their time to react… which further cooled the enthusiasm of foreign investors. “There was no major recovery plan like in 2008, but more discreet actions, such as allowing banks to lend more or lifting certain restrictions,” notes Alexandre Baradez.
Too little, too slowly? It is a political choice, believes Xin Sun. In 2008, all the money injected into the economy had the desired effect, but it also benefited those who had helped create the problem, such as some banks. This time, “the government did not want everyone to benefit and decided to take much more targeted measures”, underlines Xin Sun.
It seems that the authorities have become aware of investors’ disinterest in these political subtleties. Prime Minister Li Qiang announced on Monday January 29 that stronger measures were needed to support the stock market. A statement which comes as Bloomberg claimed that the Chinese government was regarding to unveil a $280 billion support plan.
China “can hope to have hit rock bottom and that this is the start of a comeback,” believes Alexandre Baradez. But only, according to him, if there is not another Evergrande waiting around the corner.
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