Two critical developments in China caught the financial markets off guard last year.
The first was China’s regulatory crackdown on a host of sectors: technology, financial technology, after-school education and gaming.
This involved implementing a more stringent approval process for Chinese technology firms seeking offshore IPOs, especially in the US, as well as applying pressure to specific companies.
For example, ride-hailing company Didi, which initially resisted pressure from the Chinese authorities and pushed ahead with plans to list in the US, then decided to delist within months of its US debut in order to switch its listing to Hong Kong. Some big tech names, including Alibaba Group and Tencent Holdings, were fined for alleged anti-monopoly behaviour.
The regulatory clampdown also involved barring for-profit, after-school tutoring in core school subjects in an effort to boost the country’s birth rate by lowering living costs. As for gaming, restrictions were imposed to limit the amount of time that under-18s can spend gaming online.
The result of these upheavals? US-listed Chinese stocks suffered a brutal sell-off that wiped about $1 trillion off their value in 2021, plans for offshore IPOs were scrapped, education-related stocks went on a roller-coaster ride, and investors became more distrustful of China’s interference in the capital markets.
The second big drama was the growing credit crisis in China’s bond market, stemming from pressure on real estate companies, which were among the biggest and most dominant issuers of international dollar bonds in Asia.
It started with China Evergrande Group, the world’s most indebted property developer with about $300bn in liabilities and with assets equivalent to 2% of China’s GDP. Its financials came under intense pressure in 2021, triggering a spate of non-payments on its international and domestic bonds, eventually spilling over to the rest of the sector.
This led to several other Chinese developers facing liquidity issues and defaults, and the debt market all but closed its doors to the sector.
Will markets fare any better this year?
All the signs show that banks, investors and companies should hunker down for a choppy year ahead.
On the equities front, despite some of the overhang being lifted in early January by China publishing a set of new rules for overseas listings from internet platforms, there are still plenty of unanswered questions. Will the approval process for new listings be problematic or simple? Will China introduce more new regulations and, if so, which sectors will be in focus? What kind of companies will be targeted next? The year ahead could bring more uncertainty around these matters.
When it comes to the debt market, property companies are not out of the woods yet. Chinese developers have $52.3bn in offshore refinancing needs this year, according to research from CreditSights. But 56.5% of the offshore bonds maturing or puttable this year were issued by firms with poor credit quality, or those rated in the B and C buckets.
This does not bode well: the bond market is still largely closed for high-yield rated companies, and the prohibitively high secondary yields limit their fundraising access.
The funding environment is likely to remain weak at least for the first half of this year, unless the government and the Chinese regulators really loosen their policy in favour of the real estate sector.
Is respite on the way? With Covid-19 cases linked to the Omicron variant surging in China and globally, and economic growth momentum subsiding, the outlook is far from optimistic. This is despite Asia's primary bond markets pushing out deals rapidly this week ahead of looming interest rate hikes by the US Federal Reserve.
For the year ahead, there are likely to more more unknown unknowns that could derail momentum, deal flow and funding conditions. The market should not expect an easy ride, but be prepared for more turbulence and unanticipated developments.
This opinion piece was also published in Asiamoney in January 2022.