2020年10月31日星期六
 
專家論市
Martin Hennecke

State advances as developers retreat
 
28/09/2020
 
<p>A report last week that China Evergrande (3333) sought government help to restructure and avert a cash crunch not only sent the developer&#39;s share and debt prices diving but also caused China Evergrande New Energy Vehicle (0708) and the related mainland internet service integration operator HengTen Networks (0136) to fall sharply, while triggering a domino effect.</p><p>Many housing enterprises were worried about being dragged down and fell accordingly.</p><p>I will not be talking about whether the rumors about Evergrande&#39;s woes are true or not, since it is the developer who needs to provide evidence to the contrary.</p><p>Performance reports do indicate that Evergrande&#39;s debt is indeed on the high side and if these rumors to continue to ferment, Evergrande&#39;s share and bond prices will continue to fall, and its creditors will have good reason to demand Evergrande repay its debts in advance.</p><p>So by then, even if the rumors were not true, the crisis would have eventually become real.</p><p>Last month, China set up &quot;three red lines&quot; for real estate firms that set limits on bank borrowings.</p><p>Under the policy the asset-liability ratio of developers shall not be greater than 70 percent after excluding the advance payment, the net debt ratio shall not be greater than 100 percent, and the ratio of &quot;cash to short-term debt&quot; must be less than one.</p><p>There red lines have increased the pressure on real estate developers to reduce their debt and at the same time put many real estate stocks in urgent need of restructuring to increase cash flows.</p><p>However, while China has witnessed a recovery from the pandemic, many other countries across the world continue to be affected, so China&#39;s export sector is still under pressure and its economy is still not fully recovered.</p><p>At the same time, the monetary policy of the People&#39;s Bank of China is not the same as the central banks of other major nations, which have continued to maintain loose conditions.</p><p>Therefore, this has also put a lot of pressure on real estate enterprises in terms of boosting cash flows.</p><p>And since China is likely to be the only country to see economic growth this year, it will be hard for the PBOC to come up with further large-scale monetary easing.</p><p>This means that many of the affected developers will have to reduce their debt by their own means, including asset sales, to toe the &quot;three red lines.&quot;</p><p>Of course, the &quot;three red lines&quot; are to some extent equivalent to requiring real estate firms to deleverage, but even if China&#39;s GDP growth is positive next year, the pace of the recovery cannot be called steady.</p><p>In this context, is it an appropriate time to leverage? And while the &quot;three red lines&quot; will put pressure to many housing enterprises it may also provide opportunities for state-owned enterprises to acquire assets.</p><p>As a matter of fact, in recent years, China has leaned towards a policy that &quot;the state advances while the private sector retreats.&quot; But now, because of the pandemic, 46 A-share-listed companies have been fully taken over by state-owned enterprises in the first half of this year, including 16 in June alone, exceeding the total number of last year.</p><p>Therefore, &quot;three red lines&quot; may not only put financial pressure on many housing enterprises but also further increase the share of state-owned enterprises in the real estate market.</p><p>But only time will tell if &quot;the state advances and the private sector retreats&quot; is a good direction and policy or not.</p><p>In the 1930s, Germany nationalized most enterprises and the German stock market rose about 80 percent in three to four years, but when the world fell into a severe economic depression, Germany too was not spared, and this became a drag on its economy and even led to the Second World War.</p><p>Therefore, whether &quot;the state advances and the private sector retreats&quot; is good or bad is difficult to determine at this moment in time, but it seems inevitable that many troubled real estate firms may be taken over by state-owned enterprises.</p><p><em>Andrew Wong is chairman and CEO of Anli Securities</em></p>
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