Bad debt and education clamp pile pressure on HSI

Global stock markets have performed well so far this year, with the majority of them up more than 10 percent but stocks in China and Hong Kong have lagged behind their peers and have risen less than 5 percent over the same period.

Now, after ending last week at 27,321 points, the Hang Seng Index has become one of the few markets to record a decline.

Tighter antitrust regulations have hit China's top firms and this has no doubt affected the Hang Seng Index.

This is understandable because several countries have antitrust laws and many American tech and internet enterprises have also been fined over monopolistic behavior. Therefore, most investors understand and accept the fact that tech giants such as Alibaba, Tencent and Meituan are trapped in their lows.

However China's beefed up anti-monopoly law is not the only thing having a negative impact on Hong Kong as China Evergrande's escalating debt crisis and Beijing's crackdown on the country's private education industry has jolted Hong Kong's market over the last week.

These two issues will definitely affect overseas investor confidence in Chinese firms.

Let's first talk about Evergrande's woes.

As I mentioned last week, bond defaults by Chinese corporates hit a record 62.59 billion yuan (HK$75.04 billion) in the first half of the 2021 with state-owned enterprises accounting for more than half of the defaults at 36.65 billion yuan.

This probably indicates that the central government is no longer willing to pick up the slack and guarantee the debts of state-owned enterprises.

But in Evergrande's case, the government will not step in to rescue the indebted developer unless its debts pose a systemic risk to mainland banks.

However, banks in China have very strict loan programs in place and Evergrande must have enough collateral - including assets such as land and property - to be able to borrow large sums from them. So if Evergrande is really strapped for funds and unable to repay its loans, the banks would just take over these assets, and it would not balloon into a huge crisis nor cause any systemic risk.

Therefore, the central government will not be inclined to take any measures to resolve Evergrande's debt woes, but investors who hold bonds issued by the developer will be one who get their fingers burnt.

They are already bracing for heavy losses and will be reassessing the risk factor of investing in Chinese corporate bonds.

This will not only make it harder for Evergrande to reissue bonds and resolve its debt problems, but also affect the chances of several Chinese companies looking to raise funds.

Meanwhile, last week's crackdown on private educators saw Chinese education stocks as well as other Chinese firms listed in Hong Kong and the United States fall sharply.

This shows that investors - when faced with uncertainties over official policy and fears over bad debt - will temporarily reduce their investment in Chinese stocks, so this will be a drag on Hong Kong's market in the short term.

More importantly, in the wake of the government's crackdown on tech and internet giants and shake-up of the education sector, questions will be asked about which industry will become the next target of central reform.

And as the amount of bad debt continues to rise, I believe many investors will be concerned about Chinese enterprises, so Beijing should consider taking steps to restore investor confidence.

Andrew Wong is chairman and CEO of Anli Securities