China mortgage crisis and 10 stocks to watch

In this article, we discuss China’s mortgage crisis and 10 stocks to watch. If you want to see other actions to watch for 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 housing market plummets and authorities scramble to control the mess. China’s mortgage crisis is the result of delayed housing projects by the China Evergrande Group, which have eroded the confidence of thousands of home buyers, leading people to boycott mortgage payments in more than 90 cities amid widespread manifestations. Chinese authorities, in an effort to control public outrage, began monitoring protests and policing the population, as well as shutting down online communities where users shared their heartfelt opinions on the housing debacle.

It remains to be seen how the People’s Republic of China’s $56 trillion banking sector will be affected by this crisis. According to S&P Global Ratings, about $356 billion, or 2.4 trillion yuan, or 6.4% of total mortgages are at risk. Deutsche Bank AG, on the other hand, has warned that at least 7% of home loans are at risk of default as buyers threaten to boycott payments.

‘Caught in the Middle’

Zhiwu Chen, professor of finance at the University of Hong Kong Business School, Told Bloomberg on August 1 that “banks are caught in the crossfire” because of the current crisis. This means that if they don’t help Chinese developers complete the housing projects, they will end up losing their mortgage payments. However, if they chose to extend assistance in this crisis, the authorities would be happy but the banks would be highly exposed to “delayed real estate projects”. The blows already taken by the Chinese economy include slowing economic growth, the financial crisis caused by the pandemic and the peak of youth unemployment.

As the government prioritizes the financial stability of the economy, it is rolling out measures such as grace periods on pending mortgage payments and setting up a central bank fund to provide financial assistance to builders and to promoters. Banks are under pressure to actively save 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 of loans to developers.

Recession report

According to Bloomberg Intelligence analysts Francis Chan and Kristy Hung, China may reach out to 10 of its biggest banks to borrow excess capital and loans, as they have a total of about 4.8 trillion yuan ready to go. savings. Bad debts from lenders reached 2.9 trillion yuan at the end of March, and these degraded loans are expected to reach new levels as the economy is further stretched due to the mortgage crisis and the remnants of the pandemic that continue to wreak havoc. havoc. Although China’s total debt-to-GDP ratio is expected to set a new high in 2022, the public has been reluctant to take on more debt. There are debates about China falling into a “balance sheet recession” as households and businesses cut back on spending and investment.

S&P Global has predicted that home sales could drop about 33% this year in the face of the mortgage boycott, which will add to developers’ liquidity constraints and lead to increased defaults. About 28 of the top 100 developers by sales have either disclosed bond defaults or requested debt extensions in the past year. Real estate investment, which fell to 9.4% in June, is supporting demand for goods and services in China and generating 20% ​​of total gross domestic product.

While Chinese companies 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 materials suppliers and social media companies have come under fire as authorities scramble to quell mass protests and bring the mortgage crisis under control.

Our Methodology

We picked leading Chinese companies that are caught in the crossfire of the mortgage crisis. These companies are directly affected by any measures taken by the government 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 companies caught in the middle of China’s mortgage crisis, as a lawyer shared a document on the platform that caught the attention of research firms and global investment banks like Citigroup, to gauge the effect of the public boycott. The police and government subsequently deleted posts that exposed any delayed projects, and several social media accounts of irate shoppers were banned and deleted. The government may take other actions that may have a material impact on Zhihu Inc. (NYSE: ZH).

On July 5, Goldman Sachs analyst Lincoln Kong lowered Zhihu Inc.’s (NYSE:ZH) price target to $2.60 from $4.70 and reaffirmed a neutral rating on the stock. “multiple hurdles” and a timeframe for profitability obstructed by higher operating expenses.

According to data from Insider Monkey, Zhihu Inc. (NYSE:ZH) was in 5 hedge fund portfolios at the end of Q1 2022, up from 13 funds last quarter. Jonathan Guo’s Yiheng Capital held the largest stake in the company, comprising 18.4 million shares worth $44.5 million.

Zhihu Inc. (NYSE:ZH) stock has lost about 75% of its value year-to-date to Aug. 10 as investors quickly dump growth stocks. This is why only 5 hedge funds remain bullish on the stock in the first quarter of 2022, compared to 13 funds in the previous quarter. Hedge funds instead load up on safer Chinese stocks 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. The Company manufactures and sells alumina, primary aluminum, aluminum alloys and carbon products in China and abroad. The Company operates through five segments: alumina, primary aluminum, trading, energy, corporate and other operations. The stock has fallen more than 35% since the start of the year to August 10.

As the products of Aluminum Corporation of China Limited (NYSE:ACH) are used quite frequently in residential construction, the fate of the company hinges on the conclusion of the mortgage crisis. If the construction of Chinese residential homes on hold is accelerated, Aluminum Corporation of China Limited (NYSE:ACH) has everything to gain. If there are too many public protests and the Evergrande project does not make notable progress, sales of the Aluminum Corporation of China Limited (NYSE:ACH) could slow. The mortgage crisis has also shaken real estate sentiment in the country, so housing demand may not pick up in the near term, further affecting companies like Aluminum Corporation of China Limited (NYSE:ACH).

Of the hedge funds tracked by Insider Monkey, 5 funds reported holding stakes in Aluminum Corporation of China Limited (NYSE:ACH) at the end of the first quarter of 2022, with a collective value of $12.4 million, compared to 6 funds in the previous quarter with a value of $16.3 million. Jim Simons’ Renaissance Technologies is the company’s largest shareholder, 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 businesses 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 sweeping measures to control risk, lenders with significant exposure to the housing sector could come under pressure. Mortgage loans accounted for about 34% of China Construction Bank Corporation’s (HKSE: 0939.HK) total loans at the end of 2021, which is above the 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 personal and corporate banking products and services 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 provide home loans, and since home loans are in danger as customers refuse to make mortgage payments, the Postal Savings Bank of China Co ., ltd. (HKSE: 1658.HK) might be in trouble.

On July 20, Goldman Sachs analyst Shuo Yang maintained a buy rating on H shares of Postal Savings Bank of China Co., Ltd. (HKSE: 1658.HK), but removed the company from Goldman’s condemnation list with a price target of HK. $6.51, compared to HK$7.14. However, the analyst downgraded A shares from Buy to Neutral. He thinks the growth investment value of Postal Savings Bank of China Co., Ltd. (HKSE:1658.HK) remains intact, resulting in a buy recommendation on 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 real estate development industry 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 developing residential properties, and it’s the main company caught in the middle of China’s mortgage crisis. Prolonged delays by China Evergrande Group (OTC:EGRNF) in completing construction for its customers has led to the company being at the center of negative headlines. In the past six months alone, the stock has lost more than 40% of its value.

China Evergrande Group (OTC:EGRNF) is making negative headlines as it is at the center of China’s mortgage crisis. Investors looking to gain exposure to Chinese stocks should play it safe and look for stocks like Alibaba Group Holding Limited (NYSE:BABA), Pinduoduo Inc. (NASDAQ:PDD) and Baidu, Inc. (NASDAQ:BIDU) instead. for a balanced investment. wallet.

Read on and check out the rest of the stocks on this list by clicking China’s Mortgage Crisis and 5 Stocks to Watch. Suggested items:

Disclosure: None. ‘Caught in the middle’: China’s mortgage crisis and 10 stocks to watch is originally published on Insider Monkey.