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CHINA - Time to Buy?

Updated: Nov 19, 2021

China is switching to a new model of economic development. Before the pandemic, the huge debt burden of the largest companies was not a problem, since the constant sales of real estate (like Evergrande) and new loans made it possible to support earlier loans. With the advent of quarantine, the situation changed, home sales fell, and restrictions on the debt burden of companies were introduced, which did not allow taking new loans to maintain old ones. Essentially, the economic growth model has stopped working.

Evergrande is on the brink of bankruptcy (they escaped it for the third time on Wednesday at the last moment). Such a large company is highly integrated into the Chinese financial system, especially given the high percentage of household savings in real estate. Fuel to the fire is added by the fact that large foreign funds (the same BlackRock) are shareholders of Evergrande. All of this together makes the potential default of Evergrande a financial disaster.

China's regulator, meanwhile, initially saw no problem in allowing Evergrande to go bankrupt, since " they took on such big risks themselves ." Nevertheless, over time, the regulator began to propose plans to avoid default, to divide the company's capital and buy it by other large developers (no one really wanted to buy it). The problem is, Evergrande isn't the only company on the brink of bankruptcy . The entire sector is at risk, all developers (do not forget that they all worked in approximately the same way). China's real estate developers have too much influence on the economy for their default to have long-term consequences.

The latest news and news feeds play an important role in the dynamics of the market:

November 15 - Beijing Stock Exchange opens. Initially, 81 companies will be traded on the site, mainly the exchange will be sharpened for the technology sector and innovation (according to SI). It is believed that the exchange is registered for the purpose of conducting IPOs of Chinese technology companies on it, and not on American exchanges. The regulator of China previously arranged a "nightmare" for companies trading on American stock exchanges. Among them is DIDI, who are planning to launch applications again soon, and have allocated 10 billion yuan for the payment of a fine to the regulator. The list of companies to be listed on the exchange includes Beijing Henghe Information Technology, Keda Automation Control and Anhui Jingsai Technolog

Nov 15 - SI and Biden hold virtual meeting (possibly news on the Trump trade war and trade bans. So far, Biden has supported Trump's China policy and extended bans. Example: Biden signed a law banning the use of Chinese telecommunications equipment in the US companies Huawei and ZTE.)

China plans to start issuing licenses to companies to conduct extracurricular activities (previously, the regulator banned commercial activities for tutoring and extracurricular activities). Under the new licensing agreement, tutoring companies will be required to conduct extracurricular activities on a non-profit basis, while they will be allowed to profit from other types of businesses, such as tutoring for adults in preparation for professional exams. Each licensed company will be required to establish and operate a non-profit fund to collect income from extracurricular activities. It is possible that the decision will be made by the end of November.

China's energy development plan until 2060 was recently published. This will give a boost to alternative energy stocks. Important: a peak in carbon emissions is planned until 2030, and only after that a decrease. For China, this is even good, because no transition is planned as abruptly as in Europe.

By 2025, which marks the end of China's 14th Five-Year Plan (FYP), the target is to achieve:

● reduction of energy consumption per unit of GDP by 13.5 percent compared to the level of 2020

● reduction of CO2 emissions per unit of GDP by 18 percent compared to the level of 2020

● 20 percent of non-fossil fuel energy consumption

● a forest cover rate of 24.1 percent and a forest fund of 18 billion cubic meters

By 2030, by the end of China's 15th five-year period:

● Significantly reduce energy consumption per unit of GDP

● Reduced CO2 emissions by more than 65 percent Reduced CO2 emissions per unit of GDP compared to 2005 levels

● 25 percent of non-fossil fuel energy consumption

● The total installed capacity of wind and solar power is over 1,200 gigawatts.

● 25 percent forest cover and 19 billion cubic meters of forest

● Peak and stabilize CO2 emissions

By 2060:

● More than 80 percent of non-fossil fuel energy consumption

● Achieve carbon neutrality

Based on all of the above, the following conclusions can be drawn:

It is worth keeping a close eye on the news background in the near future. Both the situation with Evergrande and the conversation between the leaders of China and the United States are news feeds that require an instant response.

It is worth paying attention to the alternative energy sector and related industries.

A quick "return" of educational companies is possible, albeit with certain bureaucratic difficulties

In the long term, it is not beneficial for China to tighten regulations. China's economy in its current state requires constant investment, which cannot be achieved without a comfortable business environment.

Stay Joseph Marc Blumenthal to stay on top of the major market trends!

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