Chinese shares popped on a return to trading after the Golden Week national-day holiday. On the first opportunity for mainland investors to react since President Donald Trump contracted the coronavirus, punters in Shanghai and Shenzhen appeared encouraged that the episode increases chances of a victory for Democratic challenger Joe Biden.
Biden is viewed in China as certainly being less hawkish on trade tariffs with the Middle Kingdom. The unpredictability of the Trump presidency, during which Trump has looked to boost trade with China while penalizing Chinese imports, has hurt the prospects of U.S.-focused Chinese businesses, as well as the Chinese operations of U.S. companies.
The CSI 300 index of the largest mainland companies rose 2.0% on Friday. The Shanghai and Shenzhen markets have been closed since the end of trade on Wednesday September 30, after which the Mid-Autumn Festival - China's equivalent of Thanksgiving - coincided with the October 1 anniversary of the founding of Communist China.
The Chinese currency performed even more strongly. The yuan strengthened 1.3% as onshore markets for the currency opened again. Offshore trading has continued but always has much lighter volumes, while the Chinese government attempts to manage the onshore market, not always successfully.
The U.S. dollar now buys C¥6.70. That is the yuan's strongest level since April 2019. The 1.3% rise is the strongest day for the yuan since 2005, when China abandoned a fixed peg to the U.S. dollar, a one-off move that revalued the yuan by 2.1% at the time.
Trump has blamed mainland authorities for unleashing the "China virus," which had its initial epicenter in the central Chinese city of Wuhan. Chinese authorities undoubtedly hushed up the initial outbreak, downplayed the potential for person-to-person transmission, and failed to stem travel at the vital Lunar New Year holiday.
But Trump's sickness has refocused attention on his apparent carelessness, both in terms of personal protection, and in protecting the U.S. nation from the virus. There has been widespread glee over the episode on the Chinese social-media platforms WeChat and Weibo, which some see as a comeuppance for Trump, although the conspiracy minded in greater China have suggested he may have contracted the virus on purpose to boost his re-election prospects.
Officially, of course, Chinese President Xi Jinping and wife Peng Liyuan wrote a letter to Trump and his wife Melania, expressing shock and wishing them a speedy recovery from Covid-19.
On the domestic front, the Shanghai and Shenzhen markets are reflecting the improving prospects for recovery in China's economy. Factory activity has increased for seven straight months.
However, everyday life is not yet back to normal, and consumers remain reticent, with the bounce back mainly driven by industrial activity. Domestic tourist sites saw 637 million visitors over the eight-day holiday, 79% of the 2019 total, China's Ministry of Culture and Tourism reports.
Mainland authorities appear confident enough in their ability to contain systemic risk in the Chinese financial system to push ahead with forced deleveraging of indebted companies, particularly in the debt-reliant real-estate industry. The property sector accounts for around 30% of all bank loans in China.
China's central bank and housing ministry started pushing change in August, and have since reportedly met with the 12 biggest developers to ask them to submit debt-reduction plans. These would require them to reduce borrowing within a year, and fully meet deleveraging targets within three years.
Of the 180 listed property developers in China, 53% face forced debt reduction, according to Bloomberg analysis. The listed developers are likely in much better financial positions than the 97,000 or so privately held developers.
"Therefore, well over half of the combined balance sheet of the entire real estate sector would face material deleveraging pressure over the medium term," Société Générale analysts Wei Yao and Michelle Lam conclude.
Late last month, there were serious concerns over the credit position of China Evergrande Group (EGRNF) , the largest property developer in China. It is also the most indebted. The company would cross all three government "red lines" of a 70% ceiling on debt-to-asset ratio, 100% cap on net debt ratio and 100% cap on short-term debt/cash ratio.
Evergrande shares and bonds plunged 15% after a letter was leaked in September in which it asked for financial help from the government of Guangdong Province, next to Hong Kong. The letter, which it said was fake news but Reuters and other news sources conclude was authentic, warned Evergrande faced a cash crunch causing potential systemic risk. Evergrande is attempting a backdoor listing of a subsidiary in Shenzhen, but if that does not go through by January 31, 2021, it will have to pay back C¥144 billion (US$20.3 billion) to investors, which it said it could not afford to do.
The SocGen analysts conclude Evergrande is not in the clear, and the episode will have "steeled the resolve" of policymakers to push ahead with deleveraging. The events "have laid bare the financial fragility of this sector, and offered policymakers a glimpse of the magnitude of the threat that such fragility could pose to the financial system."