To The Moon

I think it is really risky to invest in Chinese stocks in the current climate. There I said it!

When I mention “Chinese stocks”, I refer to stocks from both China and Hong Kong exchanges.

Both China and Hong Kong economies are in a doldrum to put it mildly.

This alone makes investment risky, when any economy is faltering due to many reasons.

If you have been keeping up with the news coming out from China, you will concur too.

(1) Property Market Crisis.

China property market is facing a major crisis.

Many developers (state backed and private) are roiling the nation’s dollar-bond market and adding to concerns about the health of China, the world’s second-largest economy.

This includes Country Garden (latest developer) seeking delay payment (for another 3 years) on a private onshore bond for the first time.

It has already suspended trading in its 11 onshore bonds: sending its shares plunging to a record low.

So, so much could happen in the next 3 years - what guarantee is there that Country Garden will not fold?

Other troubled property landlords:

• Shui On Land became the market’s latest concern on 18 Jul 2023. Its notes plunged by record amounts of more than 10 cents on the dollar after the firm said it was seeking to identify bondholders, a step that sometimes foreshadows payment delays.

• Sino-Ocean Group Holding (State-backed) halted trading in a local note that was maturing in early Aug 2023, flagging “significant” uncertainty about its bond repayment.

• A key unit of Dalian Wanda warned creditors of a funding shortfall on a maturing bond. Creditors were told that it’s still raising the money, as well as weighing an alternative unspecified plan,

• Evergrande reported combined losses of more than $81 billion over two years. The firm is seeking to convene meetings for offshore creditors to approve its credit overhaul plan.

Despite the Chinese government’s efforts to stimulate the property market by easing mortgage rates on first-home purchases; it failed to spark any demand when the economy is so “weak”.

The problem started in 2020 when the ruling party decided to limit the amount of debt developers could hold, out of the blue. That pushed Evergrande into a liquidity crisis as financing evaporated.

And they said, the rest is history.

(2) Consumer Price Index (July).

• According to the data released by the National Bureau of Statistics (NBS) on Wed, 9 Aug,

• China’s July 2023 consumer price index (CPI) fell by -0.3% YoY.

• This was lower than the median forecast of a 0.4% decline in a Reuters poll.

• This marked the first time that the CPI had a negative growth since February 2021.

In theory, when the CPI declines, it implies that there's deflation, or a steady decrease in the prices of goods and services.

(3) Producer Price Index (July).

• China’s producer price index (PPI) declined for a 10th consecutive month (see below).

• It’s down -4.4% and more than forecast of -4.1%.

• Lower producer prices likely mean consumers will pay less at the retail level.

(4) China hedge funds in crisis after losses as US investors retreat.

• Foreign investors are losing interest in China.

• Hedge funds that target the Chinese economy are bearing the brunt of the disinterest.

• Number of active China-focused hedge funds has slipped for the first time since at least 2012.

• Up until June 2023, only 5 new funds have been launched versus 18 funds liquidated; according to data from Preqin Ltd (see above table).

• According to Eurekahedge Pte, China-focused hedge funds (stock pickers in particular) are facing an unprecedented 2nd consecutive year of losses,

• In 2022, >67% of China-focused hedge funds lost money, 36% were down a fifth or more.

• In first-half of 2023, 62% of China funds failed to make money, Preqin data showed..

• The contraction marks a major shift for offshore China hedge funds, that accounted for almost 50% of new funds in Asia in as recent as 2021.

• The MSCI China Index has dropped -43% since the end of 2020, versus a 19% gain for the US S&P 500 Index over the same period.

• Latest news dating Tue, 15 Aug. Bridgewater - world’s biggest hedge fund has liquidated a third (30%) of its China stock holdings (see above).

• Does the above set your alarm bells ringing?

• According to data released by the State Administration of Foreign Exchange (SAFE) on Fri, 4 Aug 2023 - Direct investment liabilities, a gauge of foreign direct investment in China, slumped to just $4.9 Billion in the April-June period of 2023.

• This is down -87% YoY and was the smallest amount in any quarter in data back to 1998.

• China’s appeal to foreign firms has taken reputational hit.

• Factors contributing to the disinvestment included (a) Tensions with the US, (b) a dimming growth outlook and (c) fears of possible backsliding on economic reforms and (d) government’s high-handed manner in enforcing its zero-infection covid policy disregarding foreign investment is backfiring.

(5) Slippage Into Deflation.

Deflation is a decline in the prices of goods and services in an economy.

It will have negative consequences for China because it relies heavily on:

• Exports.

• Investments.

Undesirable effects of deflation for China :

(1) Reduced profits and wages.

• As prices fall, so do the revenues and profits of businesses, especially those that produce tradable goods.

• This can result in (i) lower wages, (ii) layoffs, and (iii) reduced spending by households and firms.

• Lower incomes can also reduce tax revenues and increase public debt for the government.

(2) Increased real debt burden.

• Deflation increases the real value of debt, making it harder for borrowers to repay their loans.

• This can create financial distress and defaults for households, firms, and the government, and reduce the availability and affordability of credit.

A deflationary spiral can occur when falling prices lead to lower incomes, which lead to lower demand, which lead to further price declines.

My Point Of View:

• With all the mentioned downsides, I really do not think now is the time to invest in Chinese stocks; contrary to what some other Tiger members have extolled.

• Cannot predict what the future might hold for China; it’s 50% that China might be able to turnaround and remainder 50% that it might worsen.

• Unless an investor has a lot of spare cash lying around and does not mind having his/her assets “frozen” even for short to medium term, by all means - despite this is not what an astute investor would adopt.

• Do you think China economy will turn around by end December?

• Do you think you are confident in China and will invest in Chinese stocks or funds?

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