Turmoil in China has been all over the financial news, but the volatile market is too big to ignore.
The news from Chinese financial markets in recent months certainly has succeeded in grabbing headlines. China Evergrande (EGRNY), a domestic property giant with a towering $300 billion of liabilities, teeters on the edge of bankruptcy. A Chinese government crackdown on tech companies crushed the valuations of widely held large-capitalization growth stocks such as Alibaba (BABA) and Tencent (TCEHY). Beijing abruptly restricted the weekly hours that young people could spend playing video games and took an axe to the fast-expanding for-profit education industry, eviscerating the market value of several listed tutoring securities overnight.
It’s little wonder that investors worry about the turmoil spreading to the world’s other financial markets – or about whether to invest in the humongous Chinese market at all.
But there is some good news. Despite comparisons to the bankruptcy of Lehman Brothers in 2008 (which made the firm the poster child of the subprime-mortgage crisis), financial contagion from Evergrande is unlikely to reach our shores.
Holders of Evergrande stock will be devastated, and bondholders will take some losses, but the vast bulk of the property developer’s debt is local and largely secured with real estate in China. The company was simply overleveraged, unable to increase borrowing, and it faced a liquidity squeeze, according to Jason Hsu, founder and chairman of Rayliant Global Advisors. Hsu notes that property prices continue to rise in China and says the ongoing government-led restructuring of the developer is “actually very orderly.”
China’s Recent Commotion is Just Business as Usual
As for the sudden raft of Chinese policy and regulatory shifts, which seemingly came out of left field, those closer to the scene are less fazed.
“Recent developments are not that out of character,” says Vivian Lin Thurston, a native of China and portfolio manager of William Blair’s China Growth Fund. The country’s state capitalism model combines top-down direction from the government with bottom-up entrepreneurship from the private sector, she explains. The recently espoused “common prosperity” agenda is about balancing growth with sustainability, in her view, with the government seeking to distribute the fruits of growth more broadly and bring more Chinese into the middle class.
Michael Kass, portfolio manager of the Baron Emerging Markets Fund (BEXFX), a member of the Kiplinger 25 list of our favorite no-load funds, notes that cycles of regulatory and political tightening seem to arrive every several years, with the current cycle somewhat delayed by the challenges of COVID-19.
In addition, Kass thinks that the recent shift in policy focus …….