A Chinese confidence game, but is it enough?

In a rare exchange filing late Friday, Evergrande’s management reassured the market that its real estate business was healthy and that no interest payment had been skipped. In addition, it said debt had been reduced since March. The confidence game was won over the weekend and the stock was 18% in today’s session. However, the situation is dynamic, and volatility is likely to remain high if the global economy continues to face headwinds. Evergrande with its massive debt on the balance sheet and potential contagion effects to banks (collateral values) is clearly a systemic risk to the Chinese financial system and thus our view is that the company enjoys an implicit backstop. With credit in emerging markets in general under pressure, as described by our fixed-income specialist Althea Spinozzi, the market should pay attention to developments in Evergrande and other large EM stocks. Especially since Bloomberg’s default risk model has pushed Evergrande into elevated territory.

HSBC and the wider banking problem

HSBC shares are up 9% in today’s session following confidence statements from its biggest shareholder Ping An Insurance Group. The Chinese insurance group announced that it had increased its stake marginally to around 8% and said that it has confidence in the long-term prospects of the bank. The cancelled and subsequent discontinued dividend is viewed by Ping An as short-term and that dividends will resume as the outlook improves. The bank hit lowest levels since 2009 last week with shares down 64% since the highs in early 2018 troubled by its loan book and deteriorating business in the US and UK. Market trust is the lowest since 2007 measured on the price-to-tangible-book indicating that the market believes profitability will remain low and below the cost of equity for the bank. With the increased stake from Ping An and the geographical (50/50) split between Asia and non-Asia coupled with the increasingly difficult political environment between Washington and Beijing could put a split of the bank with two listings on the table.

Tomorrow, we will follow up on European banks in general which traded at the lowest levels since 1987 as we alluded to in today’s Saxo Market Call podcast. Provisions have been rising to levels three times the realized cost cutting and consensus has lowered net revenue by $100bn for the current and next fiscal year underscoring the tough environment for banks. At one point this must get the attention of the market but even more importantly the EU Commission and the ECB. More on that tomorrow.