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Chronicle - Aug 20, 2023
China's contagion effect
The China property crisis raises concerns about a global market contagion effect. The symptoms began to emerge publicly in 2021, when Evergrande Group, a large Chinese real estate developer, missed a bond repayment date. But last week, all hell broke loose.
The Bank of China Unexpectedly Cut Interest Rates
The People's Bank of China (PBOC) cut its one-year loan rate by 15 basis points to 2.5%. This movement was unexpected because most observers expected the rate to remain constant. To put that in context, an unexpected 15-bp cut by the PBOC is comparable to an unexpected 75-bp cut by the Fed. This decision came just before the release of significant economic data that turned out to be bad: weak consumer spending and industrial output, as well as an increase in unemployment.
The Government's Peculiar Efforts to Calm Down the Market
Things get worse as a result of numerous government efforts to calm the market. According to Bloomberg, Chinese authorities have requested that some investment funds refrain from being net sellers of equities. While such government intervention is common in China, the timing couldn't be worse.
Furthermore, some data points are missing from the monthly release. Although this has been going on silently for some time, some important facts, such as land sales and youth unemployment, are missing this time. The timing of the omission could hardly be worse. In June, the youth unemployment rate reached a new high of 21.3%. And that was the end of it. There is no more data for July.
Alarming News from the Corporate World
Evergrande Group eventually filed for Chapter 15 bankruptcy protection in the United States, trying to insulate itself from creditors who wished to sue them over assets in the United States.
Country Garden, which was China's largest property developer by revenue, is also in risk of default. Last week, it skipped two USD bond payments. Country Garden's liabilities exceed $160 billion, accounting for almost 60% of Evergrande's. However, Country Garden has four times the number of housing developments. It pledged to complete 700,000 units this year alone.
Zhongzhi Enterprise Group, which includes trust businesses, wealth management, and private equity and has over $138 billion in assets under management, delayed payments on numerous of its products, affecting over 150,000 investors. The products are most likely associated with real estate projects.
Global investors appear to be on high alert. In Asia, credit protection costs have risen dramatically in just a week.
Fear of a Crisis Spreading Outside China
The first victims were stocks with China business exposure. Since mid-July, MSCI World index members with China exposure have underperformed the index by more than 6%.
The Main Transmission Channel
Which countries will suffer the most if China experiences a slowdown in growth? We collect China import data as of 2022, as well as the total exports of China's trading partners. African countries and their Asian neighbors appear to be the most affected. All major Southeast Asian countries are affected, as is Australia, which exports commodities to China.
IPO — When Innovation Pervades the Simplest Thing
Innovation does not necessarily be highly associated with silicon-valley-type tech company. Our IPO stars this week — a toy company and a golf company — live and breathe innovation and it is reflected in their products, from children’s drinking equipment to golf equipment.
SRM 0.00%↑ SRM Entertainment, Inc. is a trusted toy and souvenir designer and developer, selling into the world’s largest theme parks and entertainment venues. Revenues were $1,086,888 and $707,105 for the three months ended March 2023 and 2022, respectively, and $6,076,116 and $2,665,827 for the fiscal years ended December 31, 2022 and 2021, respectively, which reflects improved sales in 2023 and 2022 at theme parks that were negatively impacted by the closures in 2020 and 2021 due to the COVID-19 pandemic. It plans to sell its proprietary brands and designs into new channels: convenience stores, additional venues and museums, and theme restaurants.
SPGC 0.00%↑ Sacks Parente Golf, Inc. is a technology-forward golf company, with a growing portfolio of golf products, including putting instruments, golf shafts, golf grips, and other golf-related products. The net proceeds from the IPO will be for new opportunities and expansion into Asia, to fund marketing and professional tour related expenses, to repay debt, pay accrued compensation, and the remainder to fund manufacturing expansion, and for working capital and general corporate purposes. Its shares jumped 624% on Aug 15, 2023, record for US IPOs.
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