China and the US, both with highly centralized economies, also show remarkable uniformity in triggering financial crises. As America rolled the mortgage crisis into the rearview mirror, it seems that China may be headed for a bigger one.
Data protection laws restrict the global flow of information
The Chinese technology market has not performed well, to say the least. After the National People’s Congress passed a new data protection law last Friday, China’s largest tech players continued to decline. The Amazon equivalent, Alibaba, was down 2.6%, while Tencent Music Goliath was down 3%. Overall, blue-chip Chinese stocks in the CSI 300 index fell 2%.
As of July 2020, that represents a nearly 11% decline in the Hang Seng Tech Index, which represents 30 of the largest Chinese tech companies. In early August, the tokenist noted a loss of $ 740 billion in Chinese stocks since February. Investors around the world blame China’s new Personal Data Protection Act (PIPL) and Data Security Act (DSL), which will regulate China’s digital landscape for the foreseeable future.
Just as the EU’s GDPR has led to friction with non-euro zones, similar activities are expected from China’s mirror laws. In addition, China’s State Administration for Market Regulation (SAMR) puts technology companies to the test – regardless of their size. Last November, SAMR fined Alibaba $ 2.8 billion as part of an anti-monopoly action.
By comparison, the EU fined Amazon $ 887 million this July for GDPR data breaches. New Chinese laws are poised to accelerate this trend by punishing any company that violates PIPL with up to 5% of its annual sales. As a result of this wave of regulation, investors are quickly losing confidence in Chinese technology stocks.
Is the stock market restriction in China even more?
Despite appearing to be in geopolitical opposition, China and the US share important economic similarities. Many argue that both the US and China practice state capitalism, have corporations closely linked to the government, and rely on central banks. The People’s Bank of China (PBoC) ranks third by total assets at $ 5.1 trillion compared to the Fed’s $ 8.2 trillion.
In addition, Chinese banks comprise four of the world’s top ten banks by market capitalization. More importantly, they have deep exposure to Chinese real estate developers and hold nearly $ 15 trillion in loans. This leads to another strong parallel with the American economy. In particular, the collapse of Lehman Brothers at the height of the subprime mortgage crash.
Prior to bankruptcy in 2008, Lehman Brothers was the fourth largest investment bank in the United States, with $ 613 billion in loans and $ 639 billion in assets. The bank could not sell them after the crash of the real estate market and filed for bankruptcy. Thirteen years later, an eerily similar dynamic seems to be taking place in China.
Will Evergrande Group trigger China’s own financial crisis?
A week ago, on August 17thNS, 2021, Xu Jiayin has submitted his resignation as chairman of the Evergrande Real Estate Group (HKG: 3333). Just as Google became the controller of the information superhighway and Amazon dominated e-commerce, China Evergrande was responsible for developing over 280 Chinese cities.
Right behind Country Garden Holdings in 2020 sales, Evergrande Group has been in full collapse mode since July 2020, falling 80% to the ground.
The consensus among Western analysts about Evergrande’s rapid collapse seems to be that it relies too heavily on debt to grow. The strategy has failed, however, as the company is now facing an onslaught of unpaid bill lawsuits. As a result, S&P Global Ratings has since downgraded Evergrande from B- to CCC, while its long-term rating on US dollar notes has fallen from CCC + to CC-. The latter represents a very high credit risk rating with imminent default on payment.
Similarities with Lehman Brothers continue to grow. Although the Fed failed to save Lehman Brothers, it did so with AIG just a day after Lehman filed for bankruptcy. In an unusual public move, the PBoC and CBIRC announced after meeting with Evergrande executives on Jan.NS:
“As a top real estate company, Evergrande must seriously implement the strategic agreements of the central government in order to ensure a stable and healthy development of the real estate market and strive to keep operations stable.”
It is unclear how large Evergrande’s debt exposure is, but some estimate it in the upper range of a few trillion dollars. More than 128 banks are involved in the commitment, while the PBoC had already classified the company as a potential systemic financial risk in 2018. In addition, the Singapore-based consumer bank DBS Evergrandes puts its stake in the dollar bond market at 4% of China’s high-yield real estate bonds.
With the CEO’s resignation and nearly 4 million jobs at risk, the silver lining is that China can learn lessons from the American real estate crash. When the PBoC ends up printing massive bailouts, it will be interesting to see its impact, considering that the yuan is not a global reserve currency like the USD.
How do you see developments in China? Let us know in the comments below.
About the author
Tim Fries is the co-founder of The Tokenist. He holds a B.Sc. in Mechanical Engineering from the University of Michigan and an MBA from the University of Chicago Booth School of Business. Tim was a senior associate on the investment team in the US Private Equity Division of RW Baird and is also a co-founder of Protective Technologies Capital, an investment firm specializing in sensor, protection and control solutions.