The hidden crisis of Hang Seng market
As I always inform, our proprietary framework in figuring out the market cycle, starts from interpreting the price patterns of asset classes. Let’s look at Tencent price pattern and its trend in month timeframe as shown in the below chart. I regard Tencent as the proxy of technology sector of China and Hongkong economy.
10-week EMA line crosses 150-weeks EMA line for the first times in 18 years since Tencent was IPO. It a sign of big downtrend. According to my experience, normally when 10-week EMA line cross 150-week EMA line, crisis is likely to happen in that sector.
Let’s cross check with real estate and restaurant sectors
In real estate sector, I do not only check with SOHO, but I also check with other big property firms such as, Vanke, Evergrande, etc. They all perform poorly. Their price patterns are likely to be in bearish mode and downtrend for many years to come.
So do the Restaurant sector (I regard Hai di lao as the proxy of restaurant sector), it performs as poorly as the real estate sector does. Their price patterns make me question about China and Hong Kong economy, there should be somewhere rainy.
The importance of China real estate sector
Short seller legend, Jim Chanos, the president and founder of Kynikos Associates, a New York City registered investment advisor focused on short selling. He mentioned in 2018 that he believed Chinese real estate to be the most important single asset class in the world. His reasoning was that the real estate represented nearly half of Chinese investment, and nearly half of the Peoples Republic's GDP is investment. Chinese GDP is $12 trillion, according to the World Bank; therefore, with global GDP a smidgen over $80 trillion, this one market accounts for between 3-4 per cent of global GDP. You can find the link as below:
https://www.ft.com/content/0c425314-9850-315e-9c2f-b5c0de4b3e96
For those who may not follow China economy, Evergrande was the second largest property developer in China by sales. In 2018, It became the most valuable real estate company in the world. In 2021, Evergrande total debts were estimated in the $300billion. And the company defaulted to pay the debts. You may read more details from the following link on, 2020-2022 Chinese property sector crisis:
https://en.wikipedia.org/wiki/2020%E2%80%932022_Chinese_property_sector_crisis
There’s a lot of Evergrandes out there is China – Evergrande just happen to be one of the biggest. – Jim Chanos
Let’s check what’s happening to other Chinese property developer firms:
1. Sunac China Holdings, China’s fourth largest developer by sales in 2021, failed to pay $29.5 million in interest. It defaulted $741.6 million bond
2. Chinese property developer Kaisa defaults on $400 million debt.
Let’s imagine that China has never been in economic crisis or recession since its economic reform in 1978. Almost all Chinese industries have tremendous debt to equity, not only property sector. The country also has the shadow loans and housing loans. Moreover, 50% wealth of Chinese population are in real estate sector.
Chinese property sector crisis is making the value of loan collaterals decreasing. Moreover, the US 10year bond yield is in the beginning of uptrend in 40 years since 1980. And China is facing the lock down due to zero covid policy. Global bond market is not functioning as they were for decades.
I am not quite sure what will happen in Chinese economy, but something smelly and worth to be cautious. Let’s the market unfold to us but be careful if you are investing in China right now.