China property nerves continue stalking Asia

Evergrande payment due later this week

China property developer, Modern Land (China) Co Ltd, become the fourth China property developer to default on an overseas debt obligation yesterday. Although the amount is small, relatively, ongoing concerns about the property sector in China appear to be weighing on sentiment in Asia today. Evergrande, the centre of the China property storm, has another grace period payment due this week on 29 October, and nerves will be taut until it does, or does not, make payment.

That has rather subsumed the noise from Wall Street overnight where Tesla hit a USD 1 trillion valuation after its shares closed 12.60% higher after announcing a 100,000 vehicle sale to Hertz. The USD 4.4 billion sale added over a USD 100 billion in market cap to Tesla as investors voted with their wallets over who will win the EV race. The embattled Facebook also rose, despite Q3 revenue missing slightly at USD 29 billion and a slight downgrade to Q4 projections. Money talks despite its travails elsewhere in the public domain and it seems a lot of bad news was priced into its stock. Fellow tech heavyweights, Apple, Alphabet and Twitter all announce this afternoon, in what is peak earnings week for the US.

South Korean GDP missed slightly this morning at 0.30% Adv Q3, with weakness showing up in domestic consumption thanks to Covid-19 restrictions. However, strong results from semiconductor supplier SK Hynix, and a 6-month cut in fuel taxes by the government, seem to have limited the fallout with the Kospi in positive territory. Like the Nikkei, also on fire today, both have a lesser correlation to China’s property sector nerves than ASEAN markets. A new poll released today, suggesting the ruling LDP will maintain a majority in the Lower House at this Sunday’s elections, has also boosted Japanese markets, although the Nikkei 225 seems to be joined at the hip with the US Nasdaq’s directional movements at the moment.

Singapore Industrial Production, a volatile data series at the best of times, is expected to retreat to just 0.30% MoM for September from 5.70% in August. As long as the positive trend stays in place, any fallout should be limited. Europe’s calendar is also quiet with just 7-year Bund and 5-year Gilt auctions to grab investors’ interest. Most interest will be on the bid-to-cover ratios for the German and UK bonds with the ECB to meet on Thursday and the BoE rate hike trade still in full swing in the UK.

US New Home Sales, the Case-Shiller House Price Index and the Richmond Fed Manufacturing Index will be of passing interest to markets, especially if they further highlight inflationary pressures (US CPI calculations do include housing costs), and supply chain challenges. In all likelihood though, it will be the Q3 results from Apple, Alphabet and Twitter that will drive directional volatility on Wall Street this afternoon.

In China, the PBOC added another big chunk of liquidity today, injecting CNY 190 billion via the reverse-repo market. Although I still expect a RRR cut in November, it probably won’t happen until after the Central Committee meeting, held between 8-11 November. The PBOC seems content to calm markets this way, for now, claiming it is helping to cover local government debt issuance and quarterly tax payments. Who am I to disagree? Meanwhile, its top economic planning organ, the NDRC, has said it is studying ways to “guide” coal prices which rose powerfully yesterday once again. It was also studying “index providers” in the same space. Unless it raises production incredibly quickly, China’s role as a price-taker in the global energy market leaves it limited room to manoeuvre.

As a final note, readers should keep an eye on the Covid-19 situation there which is rapidly evolving. The arrival of delta in Covid-zero countries in other parts of the world suggests challenges ahead, even for China. If it spreads rapidly, some severe lockdowns could follow. That would complicate an already nightmarish scenario for global supply chains under stress from China’s energy consumption cuts and the other usual suspects.

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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