Trading/Investing Thread - Page 81

HSBC Holdings Plc Chief Executive Officer Noel Quinn said the crisis enveloping China Evergrande Group was a worry for financial markets -- though he’s not concerned about the bank’s own exposure to Chinese real estate.

Jitters about Evergrande, which spread to global equities and commodities this week, could have wider implications, he said, according to a transcript of comments he made Wednesday at a Bank of America Corp. conference. “I’d be naive to think that the turmoil in the market doesn’t have the potential to have second-order and third-order impact. Clearly with the changes that are taking place in the Evergrande situation it’s concerning.”

“There is a potential for second and third-order impact, particularly on the capital markets and the bond markets, and we’ve got to stay close to that.”

Quinn said HSBC, one of the biggest international banks in China, had yet to see any direct impact from the escalating problems at Evergrande after the cash-strapped property developer missed loan interest payments earlier this week.

The CEO pointed to HSBC’s provisions for distressed loans within commercial real estate in the first six months of the year. “You wouldn’t have seen anything in that, that indicated we were concerned about our CRE exposure in China,” he said.

HSBC’s asset management arm has been among large holders of Evergrande debt, along with the likes of BlackRock Inc. and UBS Group AG. According to data compiled by Bloomberg, HSBC held a little over $200 million of Evergrande’s dollar bonds.

The bank is upbeat on the overall prospects for the Chinese economy despite recent setbacks such as the authorities’ clampdown on some large technology companies. At a Barclays conference last week, HSBC Chief Financial Officer Ewen Stevenson said the crackdown could actually be good for the lender.

Quinn said some of the issues at Evergrande, which partly stem from new government rules on real estate debt, had been well signposted. “I don’t think the regulatory reform that we see necessarily is wholly unexpected because there have been some strong signals, particularly around shadow banking, around the commercial real estate market, that some of the regulatory regime was going to change.”

Robinhood Chief Executive Officer Vlad Tenev said the firm drew down its credit line and restricted client buying of certain stocks to protect its financial position.

“Look, it is not negotiable for us to comply with our financial requirements and our clearinghouse deposits,” Tenev said Thursday on Bloomberg Television. “We have to do that.”

Tens of thousands of Chinese households who bought high-yield investments risk being sucked into the spectacular unraveling of China Evergrande Group after the embattled developer missed payments on funds sold through shadow banks, which have funneled billions into its construction projects.

Some of these lenders, known as trusts, have already dipped into their own pockets to repay wealthy investors on Evergrande’s behalf, according to people familiar with the matter. Others are negotiating payment extensions with Evergrande, said the people, asking not to be identified discussing private matters. It’s not clear how much of the funds are in arrears and there’s no evidence that trusts are passing payment delays on to customers who bought fixed-income products tied to Evergrande.

Already, missed payments on 40 billion yuan ($6.2 billion) of wealth products sold by Evergrande itself to retail investors have sparked nationwide protests, putting more pressure on Beijing to find a solution and avoid further unrest. Contagion into the $3 trillion trust industry will put at risk many more investors, while also threatening the biggest source of non-bank funding for the property sector as shadow banks retreat.

Evergrande's 8.25% bond due 2022 indicated down 0.5 cent on the dollar Monday at 28.4 cents, according to Bloomberg-compiled prices. The stock rose 2.5% in Hong Kong, paring its decline to 84% this year.

Evergrande’s dependence on trusts and other asset management products began growing after banks were directed to cut back on their lending to the property sector. By the end of 2019, Evergrande had done business with most of the 68 trust companies in China, which accounted for 41% of its total financing, based on the last borrowing disclosure.

In response to Evergrande’s financial troubles, the trust firms grew more cautious last year, with some accepting only one of dozens of proposals from the developer, often funding less than half the project value, the people said.

Trusts are also reducing their exposure to other property firms, a sign that Evergrande’s woes threaten the entire real estate industry, which accounts for more than 15% of China’s economy. The trusts have cut outstanding loans to property firms by 201 billion yuan in the first half of this year, a drop of 17%, according to the trust association.