Our position on Evergrande
Here’s an update on our position regarding Evergrande, the second largest property developer in China.
25 October 2021
What are the direct impacts?
We do not hold any Evergrande debt or equity. Our portfolios only contain one position in China – a wind power company, so it should not be impacted directly by Evergrande, and even if it was, it is an extremely small position.
What about the second order impacts?
So far the missed interest payments have not had significant impacts beyond the closest companies and people linked to Evergrande. If the conditions that led to Evergrande’s precarious financial position drive further defaults across the Chinese property sector – while still not likely to be directly impacted, we hold two property names in Hong Kong (about half a percent of our international equities exposure). It is likely a rapid slowdown in the Chinese property market would have some flow-on effects in Hong Kong. Already, the regulations that slowed home sales in China and led to Evergrande’s position are likely driving a broader slowdown in economic activity in China. Given we’re not directly exposed to iron ore or have significant exposure to other commodity export linked companies, while a slowdown in the world’s second largest economy is not positive for growth assets, we should be relatively well positioned compared to more traditional funds.
It's worth keeping in mind that this is not the first time China has faced a similar sized issue. In 2014 they faced a similar slowdown in property sector which saw another property develop restructure and default on foreign liabilities. Australian investors may be familiar with HNA, which was linked to Virgin Australia (owned 20% prior to COVID) and was of a similar size to Evergrande. It was also successfully restructured. Obviously every time this happens there is a risk that it is not successfully resolved, but we take some comfort that similar events have not caused major issues for the Chinese banks or global financial institutions.
One of the stress tests we’ve run on our portfolios is looking at what happened during the Asian financial crisis (1997) – this could be a good proxy for what could happen if we had a China centred financial crisis (albeit Australia’s ties to China have increased significantly since then) – during that period asset classes like global developed market equities and Australian shares actually delivered positive returns.
The social side of this story is not as comforting – when a major property developer goes broke, there is a risk that people lose their homes, and in Evergrande’s case there are wealth management products that investors and retirees in China relied upon. Again, big promises and high levels of debt have conspired to create misery for everyday people.