It was a savage September. Markets in East Asia took their lead from their U.S. counterparts and sold off heavily in this last week. There was surprising solidity, though, in Chinese and Southeast Asian equities.
In Tokyo, the Topix fell 2.3% on Friday, bringing its losses this week to 5.3%, while the Nikkei 225 dropped 2.5% for the day. That left the Topix, which represents all major shares trading on the Tokyo Stock Exchange, slightly in the black for the month with a 0.1% gain.
The selloff spread across the Sea of Japan. South Korea's main benchmark, the Kospi, moved 1.6% lower on Friday. That leaves the Seoul market looking at one-month losses of 5.8%.
Taiwan's Taiex index dropped 2.2% on Friday and lost 5.2% over the course of the last month. With a heavy influence from chipmakers and other electronics makers, the Taiwan market shares many similarities with that in South Korea.
Korea and Taiwan were the stars in first quarter of this year. They saw some of the heaviest selling in September, with doubts about global growth hurting their export-oriented large-caps.
Australia has posted similar figures to the losses in East Asia. The S&P/ASX 200 index fell 2.0% on Friday, leaving it with a 4.5% loss in the last month. Aussie shares now stand at a similar level to early June. Banks and mining stocks, two mainstays in Sydney, were the major drags on Friday but just about every stock lost ground.
Markets are closed here on Friday in mainland China and Hong Kong, a national-day holiday that recognizes the foundation of the People's Republic of China on Oct. 1, 1949.
The internationally focused Hong Kong market also suffered in September. The benchmark Hang Seng index dropped 5.6% in the last month.
Mainland Chinese markets were more insulated. The CSI 300 index was essentially flat, very narrowly in the red with a 0.06% loss for September.
Across Southeast Asia and other parts of the continent, the picture is more mixed. Southeast Asia's vaccination drive has finally kicked into gear, leading to gains in the Indonesian, Philippines and Vietnam markets. Singapore stocks lost only 1.1% in September, and the Straits Times index is still holding onto much of the ground gained at the start of the second quarter.
To see mainland shares hold up is something of a surprise, because China is struggling to keep the lights on. A crunch in the supply and pricing of coal has led to a rolling series of power cuts across northern China. The crisis is worsening in its second week, with some factories ordered to halt production on certain days. The stock of coal, used to produce 56% of Chinese power, is at an all-time low. Electricity rationing is expanding from the industrial northeast and power outages are now affecting 20 out of China's 23 provinces, extending into southern China.
China will have a "Golden Week" vacation next week and the stock markets in Shanghai and Shenzhen are closed until next Friday. We'll see if the week-long pause aids the energy situation.
And then there's Evergrande...
The stability of Chinese shares is also surprising given the frenzy surrounding China Evergrande Group (HK:3333 and EGRNY).
Evergrande's 79% decline this year is felt most directly in Hong Kong, where it and many of the largest Chinese property developers are listed. But analysts have been assessing whether the company's US$305 billion in debt poses a systemic risk to the mainland financial system.
Evergrande, unlike the rest of the world, had a pretty good week. Despite missing payments to international bondholders, the company's penny-stock shares gained 27.7% since last Friday's close. Although it will be in technical default on two offshore bonds in 30 days, U.S. distressed-debt funds have been buying its bonds, an extremely risky call that there will be some kind of managed restructuring.
U.S. distress specialists Saba Capital Management, Redwood Capital Management, Silver Point Capital, Marathon Asset Management and Contrarian Capital Management have been buying Evergrande's offshore bonds in recent weeks, the Financial Times reported here on Friday.
Evergrande missed a US$83.5 million payment on a bond last Friday, but trading in that bond has risen this week, hitting US$124 million on Wednesday. Evergrande's bond maturing in March 2022 is today trading at 24 cents on the dollar. One investor told the FT he bought an onshore note issued by Evergrande's main operating subsidiary, Hengda Real Estate, at 16 cents on the dollar and expects to come close to doubling his money over the next few months. He believes a low-priced tender or debt-equity swap is likely.
That's extremely bold. But if you're an investor in distress, that's what you do. Most conventional, conservative institutional investors such as pension funds and insurers have been selling and doing everything they can to insulate their portfolios from Evergrande risk.
As an overseas investor, betting on the Beijing government to bail you out is very unwise. The Chinese Communist Party has demonstrated via sudden, market-decimating policy changes that it does not care how much value is wiped off international stocks and bonds issued by Chinese companies. However, it does care very much about civil unrest as an unelected party that took power in a revolution itself, 72 year ago to this day.
The Chinese Communist Party will do everything within its grasp to ensure angry prospective homebuyers of China's troubled developers - a list that is lengthening - do end up with apartments to purchase. It will likely force Evergrande and others to sell off projects to state-backed developers. Where such an asset sell-down leaves international bondholders and stock investors is anyone's guess. Those assets could be wiped out. Domestic creditors and bondholders will certainly have priority.
The central People's Bank of China and China's banking and insurance regulator called a meeting on property finance on Wednesday. Representatives from China's housing ministry, the stock market watchdog and 24 major banks also attended. Bankers were told to maintain the "continuity and stability" of the real estate financial system and financial companies were ordered to work with local governments to prevent speculation while stabilizing land and housing prices.
Chris Wood, in his GREED & fear report, says policy easing is "surely coming up sooner or later," probably in the form of telling banks that they can lend more money to the sector. Wood, global head of equities at Jefferies, notes that while property developers are struggling to deleverage and get under China's "three red lines," Chinese banks are not currently maxing out the amount regulators allow financial companies to lend to real estate. Large banks can allocate 40% of loans to property, a figure that now stands at 27.4% of all bank loans.
A healthy portion of bad news is baked into Chinese shares already. The CSI 300 is down 7.6% in 2021, whereas most Asian markets are still up for the year despite the selloff in September.