A Bloomberg Intelligence gauge of real estate stocks trading in China and Hong Kong is less than 3% away from piercing below its end-October 2022 trough, which was the lowest since 2011, says Bloomberg on Aug 24. It adds that investors are concerned that debt problems are pushing “the largest developers to the brink of default”. Economists state that residential property constitutes roughly 70% of household wealth and contributes 30% of China’s GDP.
JP Morgan raised its global emerging markets corporate high-yield default forecast, largely due to rising contagion fears in China’s property sector from a possible Country Garden Holdings default. JP Morgan expects China property to account for nearly 40% of all default volumes in 2023, followed by 35% from Russian corporations and 12% from Brazilian issuers. “China’s real estate industry is caught in a vicious cycle where failing developers make households reluctant to purchase homes, again crimping companies’ cash flow. China’s new-home prices fell again in July, while Bloomberg reported that figures are likely far worse than what official data suggest,” Bloomberg says.
Country Garden’s share price is trading at HK$0.73, which looks like an all-time low.
The Lion-OCBC China Leaders ETF (in Singapore dollars) reflects the Hang Seng Stock Connect China 80 Index movements. While only 2% is exposed to real estate, 28.8% comprises financials, including major banks like China Merchants Bank, China Construction Bank (CCB), Industrial Commercial Bank of China, Industrial Bank Company, and Bank of China. Undoubtedly, banks are exposed to property. CCB accounts for 3.2% of the China Leaders ETF. Market watchers note that the slump in the residential property sector is impacting consumer behaviour. That may impact sectors such as consumer discretionary, which comprises 6.1% of the China Leaders ETF. BYD, the electric vehicle maker, accounts for 1.5% of the ETF.
Unfortunately, the China Leaders ETF chart pattern reflects the negativity around Chinese stocks. It has fallen below a four-times-tested support at $1.47. The chart pattern remains weak. However, the shortterm RSI is at its oversold support line, which may be able to stop the decline as the China Leaders ETF approaches its October 2022 low of $1.32. This level could be a “clearing price” where the oversold position — where all or most market players have sold the stock and have nothing left to sell — will likely lead to a substantial rebound.
If there is any glimmer of hope, it could come from China’s tech sector. The Lion-OCBC Securities Hang Seng Tech Index ETF, which replicates the performance of the Hang Seng Tech Index, managed to rebound off a minor support. Still, the volume during the formation of three white candles from Aug 22 to Aug 24 was relatively light. This compares unfavourably to the formation of black candles from Aug 11 to Aug 21, accompanied by a moderately heavier volume, indicating more sellers than buyers.
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If selling demand remains higher than buying support, the Hang Seng Tech ETF’s rebound may not have legs.
Perhaps local investors need to look elsewhere for growth. Tejas Dessai, Research Analyst at Global X by Mirae Asset, says Nvidia Corp — which is on a relentless uptrend — has a long runway ahead as “we are in the “very early innings of a multi-decade computational transformation”. Nvidia is a proxy to generative AI. “We think the market for AI chips could be as big as US$165 billion ($223 billion) by 2030, and Nvidia is clearly in the pole position from a supplier standpoint (with over 80% market share today),” Dessai says.
