Evergrande, Didi and the Bigger China Story

Evergrande’s default and the delisting of Didi Chuxing should be viewed as being part and parcel of the challenges of investing in China. The key to understanding such events is to see the bigger picture. In our latest Q&A, Portfolio Manager Andrew Mattock discusses why Xi Jinping’s regulatory interventions are in line with China’s reform agenda and why the short-term volatility and the challenges facing certain sectors in China make the market no less of a long-term opportunity for investors

Do the defaults of China Evergrande Group and Kaisa Group impact your view of China’s real estate sector?

In 2021, a tighter policy environment and concerns about the outlook of the overall property market in China clearly weakened real estate businesses. There have been other defaults among property developers but Evergrande has garnered, and continues to garner, the most attention. But a little perspective is warranted. While Evergrande is the biggest developer to have defaulted in China, in the first half of 2021, it still only accounted for about 5% of the country’s new home sales by square meter.

What about the suspension of Evergrande’s shares on January 3?

The one-day trading halt followed reports that the company was ordered to demolish apartment blocks in Hainan Province because of illegally obtained building permits. It’s another twist in the Evergrande story and it adds to the negative sentiment hanging over the sector.

Do you expect further defaults among China’s property developers?

It’s entirely possible. In a massive place like China, which had about 103,000 property developers in 2020, there will inevitably be some defaults. The Chinese government brought in restrictions last year to curb higher-risk property development and those policies have had the desired effect. They targeted the bad actors. Real estate developers have a lot of debt to work through but China has made a lot of progress in deleveraging these companies. As active managers we can navigate what we consider to be an attractive sector.