Chinese private property developer Country Garden (2007.HK) suspends its trading after running into difficulties restructuring its debt amid China's economic growth slowdown. President Biden has described China's economic situation as a "ticking time bomb" as Country Garden faces a similar predicament to property developer Evergrande in 2022.
China Beige Book International Managing Director Shehzad Qazi details Biden's executive order to limit U.S. investments into Chinese semiconductors and technology.
"Focus on what are the source of technologies that can be sold to China, and who are the companies doing it? I think they're going to be coming out as the big winners of a lot of this that is going on," Qazi says.
- Well, the economic challenges hitting China just keep coming.
Major private developer Country Garden suspended trading in 11 of its onshore bonds this morning and is reportedly looking to restructure its debt.
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Now, the issue will evoke memories of China Evergrande, which defaulted on its debt two years ago.
Last week, Country Garden missed coupon payments on two US dollar denominated bonds, that's according to Reuters.
Now, this news adds to fears of a potential crisis in the property market for the world's second largest economy.
And there are also concerns for a leading trust company as well.
JP Morgan says rising trust defaults would drag down China's economic growth by 0.3 to 0.4 percentage points.
Joining us now is Shehzad Qazi, China Beige Book International managing director.
Good to have you on the show this morning.
Clearly, a lot going on here.
So I want to first start, though, with what we're seeing out of these, corporate bonds and what's been happening with country garden holdings.
What should we make of this?
Is this the canary in the coal mine that could perhaps confirm some of the worst fears?
And how much is it different from an Evergrande situation?
SHEHZAD QAZI: Look, I think the first thing you need to look at over here is that the Chinese property market, while it's supposed to be on a recovery trajectory, is seeing a situation which can only be described as one step forward and two steps back.
You have certain months where sales are picking up, but there's price weakness.
You have other months where prices are looking better, but sales are on the downtrend.
And I think this will continue for a while.
The property market is in a multi-year restructuring process.
And what you're going to see is many other instances, as I've said in the past, of similar other developers coming under pressure because of the fact that they're unable to make sales and because and they're unable to repay their debts.
- And obviously, this is coming amid President Biden's executive order restricting US investments in China as well.
Now, if you compare the sort of reaction that we've seen to that versus some of the underlying issues in, say the property market, what concerns you more?
SHEHZAD QAZI: The Biden executive order is not something that markets need to fret about.
It's incredibly diluted and very, very narrow.
The rulemaking process will make it weaker still the conditions for restricting investments.
Because it's just a notification mechanism that it's created.
It's not a restriction mechanism.
But in instances where there could potentially be restrictions, that conditions are so tough to hit that I don't think the US regulators will be able to realistically hit them.
I am not worried about that causing any type of economic pain in reality to China at all.
China's economic challenges are largely domestic.
And whether it is softness in consumer spending, whether it is a property market, or whether it's the fact that the global economic slowdown is going to create more headwinds for the Chinese manufacturing sector, those are the problems that Chinese policymakers are more concerned about, not the Biden executive order.
- But you have to think, as we hear more of this coupling between national security and economic security when it comes to developing some of these high tech spaces, as they do become ever more intertwined, what do you think are the key things we should be keeping track of, especially for investors who are wondering, they're seeing not a pivot away from China but at least more options that they're exploring, including in places like India?
SHEHZAD QAZI: I think investors need to be looking for a couple of different things there.
First of all, especially for folks looking to make money off the fact that China is going to be a technology hungry country, I think focus in on what are the sorts of technologies that can be sold to China, and who are the companies doing it?
Because I think they're going to be coming out as the big winners of a lot of this that is going on.
That would be the foremost thing.
And of course, the other thing to understand is to what extent is the revival in industrial policy going to be shaping outcomes, I think, for different companies, both in terms of subsidies that they're going to be getting and of course what earnings and so forth would look like and what that means for the US economy as a whole?
- And so then, as we look at the rest of the year, and we look at some of the deflationary stories that are coming out of China, what should people be focusing on?
And what do you think is actually going to be the biggest headwind when you look at the sort of consumption not picking up as fast as expected.
But meanwhile, you have things like oil demand potentially picking up.
SHEHZAD QAZI: Yeah.
I think some of that, especially in the energy markets, there's a whole different story because of the fact that the Chinese government likes to stock up and have large inventories oftentimes, especially when prices have been weak as they have been in recent months.
I think the key thing that investors need to understand is that the growth slowdown in China is here, and it's here to stay.
Now, the opportunities that you need to be looking out for are within the idea that there's a structural slowdown.
But certainly, you're going to have cyclical upturns.
And I think those folks who threw in the towel earlier this year and said, oh, the Chinese recovery has completely sputtered, have totally missed out on the fact that the travel leisure, hospitality sector, the dining out sector has done really well, as a matter of fact, this year.
And there has been a very strong comeback there.
So you lost out on that opportunity if you gave up on the broader thing.
But of course, if you're going to bet on Big Bang stimulus coming down the pipeline and you're going to think that there's going to be a big commodities, revival, and big infrastructure development, you are then going to lose money because that in itself is the wrong bet.
So it's very important to understand that we are looking at a structural slowdown.
We're no longer in an era of Big Bang stimulus coming out of Beijing.
But there are opportunities to be had.
It requires nuance and much more sophisticated way of looking at China than I think Western investors have been used to doing.
- Certainly.
It requires everyone to do their due diligence and really hone in on some of these specific sectors.
A big thank you there for joining us, Shehzad Qazi, the China Beige Book International managing director.
