China Market

Will The Evergrande Crisis Cause More Pain For China Tech?

Calvin Lo

With news of Evergrande’s debt problems adding to the downward pressure on China Tech stocks still reeling from government crackdowns, I think it’s time to re-evaluate our positions in Chinese stocks.

The situation in China is evolving so quickly, so as investors in China we need to keep up with every new development there. We also need to constantly evaluate our investment thesis in Chinese stocks and make adjustments as necessary.

Government Crackdown on Tech

To recap, Chinese stocks have had a rough first half of 2021 with sentiment hit hard by government crackdown on Chinese Big Tech on antitrust, data security, and data privacy issues.

The probes and tighter regulation was sparked off in November with Ant IPO suspension after remarks by Alibaba founder Jack Ma which were deemed critical of the Chinese government.

Thereafter, a series of regulatory action in quick succession has pummelled the Chinese stock market (mainly Hang Seng Index in Hong Kong) especially Tech stocks, causing many to decline by >40% since peaking in mid-February 2021.

Common Prosperity and New Beijing Stock Exchange

There has been a bit of a respite on China Tech the past few weeks with some of China’s Big Tech names ‘donating’ funds towards the governments ‘Common Prosperity‘ drive, and news of a planned third stock exchange in Beijing targeted for SMEs.

Companies that have stepped up philanthropic commitments towards ‘Common Prosperity’ include Alibaba, Tencent, Pinduoduo, Meituan and Xiaomi. Investors may have viewed these commitments as a positive in the hopes that it might get them back into the Chinese Communist Party’s good books.

Evergrande’s Debt Problems

However, the respite was short-lived as markets continued its decline on news of Evergrande’s imminent default on a mountain of debt, reported to be ~US$300B. The risk of contagion in a possible default scenario was spooking the markets, including stock markets outside China.

After the initial knee-jerk reaction though, markets seemed to have bounced back a little. The consensus now seems to be that the likelihood of a disorderly default and subsequent Evergrande bankruptcy is pretty low. Speculation is that the more likely outcome would be a debt restructuring deal brokered by Beijing.

Personally, I agree with this conjecture as the most likely outcome. The Chinese government has shown little appetite for any sort of event that might destabilise Chinese markets and consequently Chinese society.

Evergrande, being China’s second-largest property developer with millions of homes unfinished, risks triggering social unrest especially amongst those who have already poured most of their life savings in the downpayment on their home. Many have already been protesting at Evergrande’s offices.

Should China Tech Investors be Worried?

As an investor in China Tech stocks myself (with positions in Alibaba BABA and Hang Seng Tech ETF), my key concern would be what effect this Evergrande situation would have on China Tech.

From my research so far, I don’t have any reason to believe that China Tech would be directly affected by an Evergrande collapse should that happen. However, if Evergrande collapses and the debt contagion spreads to the rest of the Chinese economy, I don’t see China Tech being spared either. In event of a disorderly default, many companies particularly in the property, finance, and construction sectors might also go down.

Personally however, I’m not too worried about a full-blown collapse, at least not yet. I’m still sitting tight with my China positions. That said, with the uncertainty this situation brings to the Chinese economy adding to the fact that the Chinese regulators may not be done just yet hitting the tech sector with tighter regulations, I’m not rushing to add to my positions in China.

I’m definitely more worried about the state of the Chinese economy and my investments in China than I was a few weeks back. Currently, I’m taking a wait and see approach. I admit I’m not any good at deep value investing and I’ve learnt not to chase a stock or market on the decline. At the moment, my exposure to China has fallen to 4.5% after months of decline. My BABA position is down >40% and HST is down ~11%. Ouch. I’m prepared for more pain but I’m still optimistic about the long-term prospects of China’s Big Tech so I’m hanging in there.

On the bright side, attention from the Chinese authorities seems to have been redirected towards Evergrande and away from Big Tech. If the Big Tech names take this opportunity to can clean up their act while the heat is off them, they might actually benefit from this whole situation and emerge stronger.

What do you think about this whole Evergrande saga? Are you buying at discount, just holding on, or running for the hills?

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Disclosure: I’m long Alibaba (BABA) and Hang Seng Tech ETF (SGX:HST)

Disclaimer: This is not financial advice. I am not professional financial advisor nor do I work in the finance industry. Anything I write here is purely my personal opinion. Please do your own research and due diligence before investing into anything. All investments come with associated risks. Best to consult a financial advisor if you’re still unsure.

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