While the liquidation of Evergrande Group looks to make waves in the Chinese economy, market watchers appear to be less fazed on how it could unfold in Australia and what it could mean for the domestic economy.
On Monday, 29 January, Hong Kong’s High Court brought an end to the long-drawn-out saga regarding the property developer, ordering it be liquidated after noting Evergrande had been unable to offer a concrete restructuring plan since defaulting on its offshore debt in 2021.
Trading in China Evergrande and its listed subsidiaries, China Evergrande New Energy Vehicle Group and Evergrande Property Services, was halted after the verdict and a liquidator, Alvarez & Marsal, has since been appointed.
“It is time for the court to say enough is enough,” said Justice Linda Chan in court regarding the more than $300 billion of total liabilities.
As at Tuesday, 30 January, the court’s announcement appears to have been met with a muted response in Australia, with the S&P/ASX 200 up, gaining 14.30 points or 0.19 per cent.
Meanwhile, the Hang Seng is down 1.95 per cent and the FTSE 100 is down 0.03 per cent.
Fund managers in Australia have likened the Evergrande collapse to “a slow train crash” unravelling over the last two years.
Appearing on an upcoming episode of the Relative Return podcast, WAM Leaders’ lead portfolio manager, Matthew Haupt, explained the Chinese property market has been “terrible for a long time”, a result of the country’s five-year plan to solve issues in private development.
Currently, he observed that state-owned enterprises contribute to 70–80 per cent of development in China, effectively marginalising private developers in the market.
“How does Evergrande affect us? Not much, because it’s been a slow train crash which we’ve been watching for quite a few years [and] everyone is well past that. I think now, the mix of the property sector in China is better, you’ll start to see more targeted support of it,” he said.
“China was happy to see volumes fall in development, but not with prices falling because it affects a lot of other things. You’ll see some more total economy, Tier-1 relief on initial deposits and more support around the property market by March or April, because they’ve really gotten what they wanted. That mixed change and that speculation is gone, so they’ll have more targeted support of property.”
Mr Haupt opined that “the worst is now firmly behind us”.
“If you told me property would be down well over 10–20 per cent from the year before, I’d have thought China would be in a total mess, but the economy has actually done alright considering, and it’s really the fixed asset investment in infrastructure providing support. They’ve actually navigated it pretty well and the outcome where we are now is actually not too bad.”
AMP chief economist Shane Oliver agreed that a situation resembling Evergrande might have raised concerns, akin to a potential “Lehman Brothers moment”, had it occurred in any other economy.
He told InvestorDaily: “We need to allow that the Evergrande problems have been around for a couple of years now and the Chinese authorities seem to keep managing its demise in a way that doesn’t substantially disrupt the Chinese economy.”
However, he highlighted concerns regarding the way the Hong Kong court’s decision could be implemented in the mainland.
“The liquidation order was obtained in a Hong Kong court at the request of offshore bond holders or debtors; it’s unclear as to what mainland PRC will make of it, whether they will prioritise offshore bond holders to the same degree or importantly any requests to liquidate or sell Evergrande assets in China,” Dr Oliver said.
“The Hong Kong ruling may not be upheld in China where the bulk of the assets are, because the mainland courts will probably give precedence to Chinese economic policy which is to protect home owners and also encourage the supply of more property.
“My feeling is, it reinforces the ongoing problems with the Chinese property market and highlights that it’s going to be an ongoing drag on the Chinese economy, but I don’t think this necessarily means that drag will certainly intensify.”
He suspected Chinese mainland authorities will “seek to manage all this in a way which is not overly disruptive”, particularly where forced liquidation is involved, while continuing with measures to stimulate the economy.
According to the chief economist, it’s “really more of the same”.
“It’s just a reminder there’s ongoing problems in the Chinese property market, there’s going to be a drag on the Chinese economy, but probably not a lot more than what we’ve seen in the last year, because Chinese authorities will respond with measures to keep the economy going albeit at a lower rate than we’re used to,” he said.
Additionally, he highlighted Chinese economic data released two weeks ago pointing to growth in the economy last year, surpassing the official target.
“That showed the economy grew last year around 5 per cent. Industrial production was up, retail sales were up, investment was up, but when you look at all the property indicators, they were all negative. Property prices were down, sales were down, property investment was down, and I think they’d probably remain the pattern for this year,” Dr Oliver observed.
“They’d remain weak but not so weak as to knock the economy into recession or cause a major fallout in Australia.”
Late last year, the Reserve Bank of Australia (RBA) noted in its Financial Stability Review that stress in China’s financial system could affect the global financial system, including Australia, via slower growth and an increase in risk aversion. It warned of the possibility of Chinese investors divesting from Australian assets during domestic economic challenges, with the main repercussions for Australia anticipated in the form of slowed global economic activity, decreased global commodity prices, and reduced Chinese imports of Australian goods and services.
Reflecting on the impact of Evergrande’s liquidation, Dr Oliver said: “Evergrande doesn’t have much exposure in Australia, so I can’t see it selling assets off. If anything, this is likely to go the other way, for Chinese investors wanting to buy assets here.
“The Chinese are still keen to emigrate to Australia if they can. Despite all the limitations we put on them buying property here, there seems to still be demand for it, and that includes people in Hong Kong, so I don’t think it’s going to trigger a major problem for the Reserve Bank.”