Invest-ability Daily 20/09/21: China cracks

Why investors need to keep a close eye on developments in the Chinese property market (and a nice picture of some classic vans)

Van life

It was never my intention to write market reports for Invest-ability, but I have returned from a rather strange Suffolk weekend of modern British art and classic Mercedes vans to a sea of red on SharePad which I probably shouldn’t ignore. The Hang Seng was down 3.3 per cent today, with the resources heavy FTSE 100 not far behind and the culprit appears to be China, with big miners and financial groups leading the fallers. As I was planning to talk about China at some point anyway now seems as good a time as any.

I have long been suspicious of the China growth story, mainly because I have been mistrustful of the economic figures for some time, more recently because the political environment there has been shifting towards something rather unpleasant – not least what has happened in Hong Kong – but also because there are lots of people in the financial world that have a vested interest in talking the country up as an investment destination. The day of a webinar in which I was ordered not to ask questions about China by one fund management group, who subsequently went on to speak glowingly about its investments in the country, was the day on which I really began to smell a rat.

Of course, the narrative is an alluring one – 1.4 billion consumers, growing their wealth from a low per capita base. But, as we are witnessing, the middle kingdom should not be considered a risk-free source of growth, and we should keep a watchful eye on companies like Prudential and Burberry – both big fallers today – that have bet big on the ‘Asia pivot, or trusts like Scottish Mortgage with huge exposure to Chinese technology stocks. The share prices of companies like Alibaba and Tencent have taken an absolute battering this year as the Chinese Communist Party has targeted internet firms in a regulatory crackdown – it wants to steer companies away from the “erroneous tendencies” of focusing solely on making profits, which is odd because that’s what I thought companies were supposed to do.   

Perhaps the government there has been looking in the wrong place anyway, as the event that has really spooked investors is the looming collapse of Chinese real estate giant Evergrande, the country’s second largest developer, and the possibility of its financial fallout spreading across the sector and beyond. The group owes over $300bn to its lenders, many of whom have been angrily protesting outside the company’s offices to try and get their money back. We have been repeatedly told in recent years of the improving standards of corporate governance in Chinese companies – and yet here is a company that appears to have repeatedly flouted them, and I am sure it won’t be alone should we start to see a broader unravelling.

Indeed, while one company does not a stock market collapse make, the real worry is that other Chinese property companies may also find themselves stretched by difficulties in the sector. One only has to look at the skyline of many Chinese cities to realise the importance of property to its economy  – equating to a quarter of GDP, it could be a very dangerous house of cards indeed that sparks the big sell-off many have been awaiting.

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