⌛️Turmoil in China property market

With the continuing weakening of the equity market that started 2 weeks ago, the recent drama surrounding Evergrande adds fuel to the deterioration in the market.

In this writing, Pika World believes that Evergrande turmoil is likely to settle down given that a resolution will need to be achieved either through what we perceived as a restructuring or outright liquidation, although we prefer the former.

Let’s get into the detail.

💰The US Dollar Strength is a Catalyst

Pika World is monitoring the strength of the dollar. In the early of the year, we initiated the contrarian view that the US dollar is expected to be firmer rather than weaker as most anticipated due to the rush of new debt by the US government.

About 3 quarters into the year, we still see a strong dollar which is in line with our forecast. However, Evergrande’s saga boldened the dollar strength, which presented a problem to the equity market.

💵Strong Dollar= Poor Purchasing Power for Global Community

A strong dollar tends to dilute households and businesses’ purchasing power. The weaker buying power suggests lower demand and poorer economic growth in a global environment still weighing down by Covid-19. This may further exacerbate the slowing growth narrative that has been singing for the 2nd month.

🧲What’s the link between Evergrande and US Dollar?

Here’s the catch. Suppose we see many real-estate firms in China having an overleveraged situation, in which their stock prices are tanking due to concern of their indebtedness. In that case, there is a risk that Chinese banks which could potentially hold some of these debts face impairments due to the loan not being paid.

This will cripple their balance sheet, although it is tough to ascertain which lender will be most hit at this stage.

Psychologically, banks will be hesitant to lend to each other despite the PBOC lowering the interest rate or in the form of monetary easing to boost lending. Yet, by reducing the interest rate, the Yuan tends to weaken vs the dollar, despite government intervention to lessen the impact of such fall. On a relative term, therefore, we would see the dollar strengthening.

At Pika World, we are shifting our attention beyond the current indebtedness and move our sight to the possible secondary effect that could further dampen the market.

Thanks for reading, and we will see you in the next one.

Cheers,
Pika Nat.