At the Central Economic Work Conference last Friday, China’s top leaders vowed to prioritise economic stability in 2022, fuelling hopes for more stimulus to aid a slowing Chinese economy. Economists now predict that China will start adding fiscal stimulus in early 2022. 
While curbs on the property industry are expected to remain, there could be fewer regulatory surprises compared with sudden moves in 2021 to rein in sectors from technology to education and entertainment, according to Bloomberg.

Chinese stocks to benefit from China’s 2022 priority? 

The Central Economic Work Conference is a key meeting that outlines the country’s top economic policy priorities for 2022.  At the end of their three-day annual conference last Friday, the Communist Party’s top decision makers said the top priority for next year is “ensuring stability.” They have strongly emphasized on economic “stability” – referring to the term 25 times – to address various challenges over the next year ranging from shrinking demand and supply crunch to downward pressure on economic growth.

According to Reuters, China will cut tax and fees, front-load infrastructure investment, and step up cross-cyclical policy adjustments next year to keep growth within a reasonable range, senior policymakers said in a statement after holding the annual Central Economic Work Conference from Dec. 8-10. 

For most of 2021, Chinese policy had been focused on curbing financial risks and reducing debt in the economy, and developer China Evergrande Group last week became the largest casualty of President Xi Jinping’s campaign to tame over-leveraged conglomerates and the overheated property market.

Chinese developers’ default risks a major headwind

Chinese stocks however, may face headwinds from the ongoing defaults from Chinese developers, who have now defaulted on a total of US$11.8 billion of offshore bonds this year. Some of the largest defaults have com efromproperty developers China Evergrande Group and Kaisa Group. 

Collectively, onshore Chinese corporate bond defaults have reached a record US$28.7billion including 39 private and 99 public offerings.

The latest default risk comes from Shimao – China’s 13th biggest developer by contracted sales and among the largest property debt issuers with about US$10.1 billion in outstanding local and offshore bonds. 

A bond issued by one of Shimao’s local units suffered the largest haircut in China’s exchange-traded repo market last week, according to Bloomberg-compiled data. Borrowers putting up a Shanghai Shimao Jianshe Co. note due 2025 for collateral get just 35% of the note’s face value as cash, down from 50% the prior week.

A major price collapse or the downfall of Shimao will cause a lapse in confidence in cross-over investment grade names in China property and could be a headwind for the HSI.