In this article, we discuss China’s mortgage crisis and 10 stocks to watch. If you want to check out more stocks to monitor in this situation, click 5 Stocks to Watch Amid China’s Mortgage Crisis.
Chinese banks are in the midst of mortgage losses amounting to $350 billion as the property and real estate market plummets and authorities grapple to control the mess. The Chinese mortgage crisis is a result of delayed housing projects by the China Evergrande Group, that have eroded the confidence of thousands of homebuyers, which led to people boycotting mortgage payments in more than 90 cities amid widespread protests. The Chinese authorities, in a bid to control public outrage, started monitoring protests and policing the people, as well as shutting down online communities where users shared their candid views regarding the housing debacle.
It is yet to be determined how the $56 trillion banking sector in the People’s Republic of China will be impacted by this crisis. According to S&P Global Ratings, about $356 billion, or 2.4 trillion yuan, which comprises 6.4% of total mortgages, are at risk. Deutsche Bank AG, on the other hand, warned that at least 7% of housing loans are in danger of default as homebuyers threaten to boycott payments.
‘Caught in the Middle’
Zhiwu Chen, a professor of finance at the University of Hong Kong Business School, told Bloomberg on August 1 that “banks are caught in the middle” because of the current crisis. This means that if they do not assist Chinese developers in completing the housing projects, they would end up losing mortgage payments. However, if they choose to extend assistance in this crisis, the authorities would be happy but banks would be highly exposed to “delayed real estate projects”. The hits already taken by the Chinese economy include slowing economic growth, pandemic-driven financial crisis, and peak youth unemployment.
As the government prioritizes financial stability in the economy, it is rolling out measures such as grace periods on pending mortgage installments and setting up a central bank fund to offer financial assistance to builders and developers. Banks are pressured to actively bailout the state from the mortgage crisis. At the end of March 2022, the People’s Bank of China compiled data that showed outstanding mortgages of 39 trillion yuan and 13 trillion yuan in loans to developers.
Balance Sheet Recession
According to Francis Chan and Kristy Hung, analysts at Bloomberg Intelligence, China could reach out to 10 of its biggest banks for borrowing surplus capital and loans, since they have a total of about 4.8 trillion yuan ready to be spared. Bad debts for lenders reached 2.9 trillion yuan at the end of March, and these soured loans are expected to touch new levels as the economy is strained further due to the mortgage crisis and remnants of the pandemic still wreaking havoc. Although China’s total debt-to-GDP is expected to set a new record in 2022, the public has been hesitant to take on more leverage. There are debates regarding China falling into a “balance sheet recession”, as households and businesses slash spending and investing.
S&P Global predicted that housing sales could decline about 33% this year in lieu of the mortgage boycott, which will add to the liquidity constraints of developers and result in higher defaults. Roughly 28 of the top 100 developers in terms of sales have either disclosed defaults on bonds or applied for debt extensions over the last year. Property investments, which plummeted to 9.4% in June, support demand for goods and services in China and drive 20% of the total gross domestic product.
While Chinese firms like Alibaba Group Holding Limited (NYSE:BABA), Pinduoduo Inc. (NASDAQ:PDD), and Baidu, Inc. (NASDAQ:BIDU) remain relatively safe in this economic environment, banks, builders and developers, machinery and raw material providers and social media companies have come under fire as authorities grapple to calm the mass protests and control the mortgage crisis.
We chose prominent Chinese companies which are caught in the crossfire of the mortgage crisis. These companies are directly affected by any move the government makes to contain the crisis, and they stand to lose heavily if the mortgage boycott continues.
‘Caught in the Middle’: China’s Mortgage Crisis and Stocks to Watch
10. Zhihu Inc. (NYSE:ZH)
Zhihu Inc. (NYSE:ZH) is a Beijing-based company that operates an online content community in the People's Republic of China. Zhihu Inc. (NYSE:ZH) is one of the firms caught in the middle of China’s mortgage crisis, as a lawyer shared a document on the platform which caught the attention of research firms and global investment banks like Citigroup, to gauge the effect of the public boycott. The police and government consequently deleted posts that exposed all the delayed projects, and several social media accounts of furious homebuyers were banned and deleted. The government can take further actions which can decidedly impact Zhihu Inc. (NYSE:ZH).
On July 5, Goldman Sachs analyst Lincoln Kong lowered the price target on Zhihu Inc. (NYSE:ZH) to $2.60 from $4.70 and reaffirmed a Neutral rating on the shares. He forecasts Zhihu Inc. (NYSE:ZH), which is the seventh-largest social media platform in China by traffic, to continue to be a market share winner within the online advertising sector, but believes a solid execution plan is necessary to offset "multiple hurdles" and a breakeven timeline obstructed by higher operating expenses.
According to Insider Monkey’s data, Zhihu Inc. (NYSE:ZH) was part of 5 hedge fund portfolios at the end of the first quarter of 2022, down from 13 funds in the last quarter. Jonathan Guo’s Yiheng Capital held the leading stake in the company, comprising 18.4 million shares worth $44.5 million.
Zhihu Inc. (NYSE:ZH) stock has shed about 75% in value year to date as of August 10 as investors rapidly dump growth stocks. This is why only 5 hedge funds remain bullish on the stock as of Q1 2022, down from 13 funds in the earlier quarter. Hedge funds are instead loading up on safer Chinese equities like Alibaba Group Holding Limited (NYSE:BABA), Pinduoduo Inc. (NASDAQ:PDD), and Baidu, Inc. (NASDAQ:BIDU).
9. Aluminum Corporation of China Limited (NYSE:ACH)
Aluminum Corporation of China Limited (NYSE:ACH) was incorporated in 2001 and is headquartered in Beijing, and the company manufactures and sells alumina, primary aluminum, aluminum alloys, and carbon products in China and internationally. The company operates through five segments – Alumina, Primary Aluminum, Trading, Energy, and Corporate and Other Operating. The stock has plummeted more than 35% year to date as of August 10.
As Aluminum Corporation of China Limited (NYSE:ACH)’s products are used quite frequently in residential construction, the fate of the company rests in the conclusion of the mortgage crisis. If the construction on Chinese pending residential homes is quickened, Aluminum Corporation of China Limited (NYSE:ACH) stands to gain. If public protests are too much and the Evergrande project does not make notable progress, sales for Aluminum Corporation of China Limited (NYSE:ACH) might slow. The mortgage crisis has also shaken the real estate sentiment in the country, so housing demand might not go back up in the near-term, further affecting the likes of Aluminum Corporation of China Limited (NYSE:ACH).
Among the hedge funds tracked by Insider Monkey, 5 funds reported owning stakes in Aluminum Corporation of China Limited (NYSE:ACH) at the end of Q1 2022, collectively worth $12.4 million, compared to 6 funds the prior quarter worth $16.3 million. Jim Simons' Renaissance Technologies is the leading stakeholder of the company, with 386,000 shares valued at $5.5 million.
8. China Construction Bank Corporation (HKSE:0939.HK)
China Construction Bank Corporation (HKSE:0939.HK) is a Beijing-based company that provides banking and financial services to individuals and enterprise customers in China and internationally. It operates through Corporate Banking, Personal Banking, Treasury Business, and Others segments. The bank provides housing loans to customers. As Chinese authorities roll out extensive measures to control risks, lenders with high exposure to the housing industry could be pressurized. Mortgages accounted for about 34% of total loans at China Construction Bank Corporation (HKSE:0939.HK) at the conclusion of 2021, higher than a regulatory cap of 32.5% for the largest banks.
7. Postal Savings Bank of China Co., Ltd. (HKSE:1658.HK)
Postal Savings Bank of China Co., Ltd. (HKSE:1658.HK) is a subsidiary of China Post Group Corporation. The company offers banking products and services for retail and corporate customers in the People's Republic of China. The bank operates through Personal Banking, Corporate Banking, and Treasury segments. Postal Savings Bank of China Co., Ltd. (HKSE:1658.HK) is one of the leading institutions in China to offer housing loans, and since home loans are in danger as customers refuse to make mortgage payments, Postal Savings Bank of China Co., Ltd. (HKSE:1658.HK) could potentially be in trouble.
On July 20, Goldman Sachs analyst Shuo Yang maintained a Buy rating on Postal Savings Bank of China Co., Ltd. (HKSE:1658.HK)’s H-shares but removed the company from Goldman’s Conviction List with a price target of HK$6.51, down from HK$7.14. However, the analyst downgraded the A-shares to Neutral from Buy. He thinks the value of the growth investment at Postal Savings Bank of China Co., Ltd. (HKSE:1658.HK) remains intact, which resulted in a Buy recommendation on the H-shares, in addition to a "compelling" valuation.
6. China Evergrande Group (OTC:EGRNF)
China Evergrande Group (OTC:EGRNF) was incorporated in 2006 and is headquartered in Shenzhen, China. It is an investment holding company mainly engaged in the property development business in China. It operates through four segments – Property Development, Property Investment, Property Management Services, and Other Businesses.
China Evergrande Group (OTC:EGRNF) is one of the leading companies to develop residential properties, and it is the main firm caught in the middle of China’s mortgage crisis. China Evergrande Group (OTC:EGRNF)’s extended delays in completing construction for its customers has led the company to be centerfold in the negative headlines. In the last six months alone, the stock has shed more than 40% in value.
China Evergrande Group (OTC:EGRNF) is making negative headlines as it is front and center in the Chinese mortgage crisis. Investors who want exposure to Chinese equities should play it safe and seek out stocks like Alibaba Group Holding Limited (NYSE:BABA), Pinduoduo Inc. (NASDAQ:PDD), and Baidu, Inc. (NASDAQ:BIDU) instead for a balanced investment portfolio.
Continue reading and see rest of the stocks in this list by clicking China's Mortgage Crisis and 5 Stocks to Watch. Suggested articles:
Disclosure: None. ‘Caught in the Middle’: China’s Mortgage Crisis and 10 Stocks to Watch is originally published on Insider Monkey.