China Investors Look For Silver Lining During National Golden Week To Boost Consumer Spending Amid Country's Property Turmoil

Hong Kong and China exchanges continue to face headwinds from cash-strapped property developers even as the domestic Chinese economy goes into a traditionally bumper holiday week.

Country Garden Holdings Co Ltd CTRYF, the country’s largest developer, was down 2% while embattled China Evergrande Group EGRNF, which cancelled a creditor’s meeting and defaulted on onshore debt earlier this week, was suspended from trading in Hong Kong after falling 18% Wednesday. China Evergrande was just relisted on August 28 after a previous 17-month suspension. Sunac China Holdings Limited, which this month successfully managed to restructure its debt amid the country’s growing property credit crisis, bucked the trend, up 1%.

China Evergrande’s electric vehicle and wealth management units have also been suspended from trading in China. The company’s founder and Chairman Hui Ka Yan has been placed under residential surveillance, according to China business daily Caixin. Residential surveillance is a type of home detention that police in China have the authority to impose on individuals connected to ongoing investigations, and lasts for a period up to six months.

“As a standalone company Evergrande is not going to bring down the Chinese economy. But Xi Jinping and his colleagues have to figure out ‘am I going to bailout private companies who have overborrowed their money or am I going to let them go down?’” Dennis Unkovik, an international real estate and M&A lawyer with a specialization in China deals, told CNBC this week. Unkovic added that China’s property market made up around 30% of the domestic Chinese economy.

There are signs that some of this is getting underway. The Chinese government is reversing course on a decades-old strategy of limiting foreign capital and now pursuing measures to attract more investors. It plans to raise the current 30% foreign ownership cap on stocks in Beijing, Shanghai and Shenzhen, according to national reports. Beijing is home to mostly State-Owned Enterprise stocks and Shanghai serves as the base for major domestic listings, whereas Shenzhen is where most of China’s tech upstarts are listed.

Golden Opportunity Week?

At the same time as it eases foreign investor restrictions, Chinese government officials are encouraging domestic travellers to travel within China to boost the domestic economy's strength for the forthcoming national holiday period and through the rest of the year. Measures such as lifting inter-province toll-way fares and incentivising travel operators to offer discounted group tours are being put into full effect, say local sources.

Hopes that a national holiday from October 1 until October 7 in China can provide the catalyst for consumer spending hung in the air a little Thursday among traders in Hong Kong and China, Bloomberg reported. Still, consumer and travel stocks remained beaten-down by the property malaise.

Air China Limited AIRYY was 1.13% lower, extending nearly 30% year-to-date declines, while Cathay Pacific Airways Limited CPCAY was down just shy of 1%. Trip.com Group Limited, one of China’s largest online booking agents, was dropping 1.6%.

Golden Week, a week-long national holiday in China since 2000, traditionally boosts travel, accommodation bookings and consumer spending going into the latter half of the year. It is also a proxy for increased property spending as investors attend trade fairs at this time of year to snap-up new home builds, a trend that looks to be blighted by the current malaise in the sector.

The number of domestic holidaymakers has increased more than 3—fold to around a quarter of China’s 1.5 billion population since the holidays began.

Over 21 million passengers are expected to take flights with a further 23 million already having booked train journeys, according to local reports. Hotels have also seen a bump in extended stays of 6- to 8-night stays among over a third of all travelers, according to reports.

“Certainly the recovery is very consumer-focused,” Jonathan Garner, Chief Asia and Emerging Markets Strategist for Morgan Stanley told Bloomberg TV recently.

“We were not really expecting property or construction to contribute to recovery this year. But the consumer is extremely strong.”

Despite the property mailaise and prospects of a national bailout for developers and financial institutions, investment managers in the region are attracted to deep discounts in the consumer and tech sector in China where there is more international exposure and where the Chinese government is focusing its efforts to ramp up investment.

Chinese stocks such as Alibaba, Inc BABA, Baidu, Inc. BIDU and BYD Company Limited BYDDF, with significant international focus and fairer valuations in particular are gaining attention.

Macau casino operator Galaxy Entertainment Group GXYEF was 4.5% lower but trading notes indicated that it might be a stock to watch if the Golden Week festivities saw an influx of gamblers come back to the island.

Other investment managers are echoing a tentatively bullish vibes for China consumer stocks going into the final quarter of the year.

China exposure appears to be “ridiculously cheap”, Alberta investment Management Corp CEO Evan Siddle told an industry conference this week.

“If you can find opportunities to participate in the growth in China, without actually being in China, those are potential mispricing opportunities,” said Siddle.