Rumors of Evergrande Bankruptcy Shake China Amid 'Strong Regulatory Shadow'... '2.7 Trillion Holdings' Middle-Class Retail Investors Cry Out

The company logo outside the Evergrande (恒大) Center building in Shanghai, China, on the 21st. [Image source=Yonhap News]

[Asia Economy Reporter Lee Seon-ae] Amid diverging forecasts about the global financial market impact of the potential bankruptcy of Chinese real estate developer Evergrande (恒大·Hengda), individual investors who have invested in Chinese stocks, known as 'Junggak Gaemi,' are deeply anxious. While opinions differ on whether the ripple effects will extend to the global financial market or remain confined to China, the situation is undoubtedly negative for the Chinese stock market. The regulatory crackdown by the Chinese government on platform companies has already caused Big Tech (large information technology companies) stock prices to plummet without bottoming out, and the added risk of Evergrande's bankruptcy compounds these adverse factors. With dark shadows of regulation looming over platforms and real estate in the Chinese stock market environment, domestic experts are increasingly calling for a cautious approach to investing in Chinese stocks.

According to the Korea Securities Depository on the 23rd, as of the recent tally date (September 17), the total amount of Chinese stocks held was $2,276,929,576 (approximately 2.6959 trillion KRW). Since the Depository only compiles related statistics for the top 50 companies, the actual scale of stocks held by Junggak Gaemi is estimated to be even larger. The top holding was Jiangsu Hengrui Medicine with $418.37 million. Following were China Tourism Group Duty Free Corporation with $228.08 million, BYD with $169.31 million, Kweichow Moutai with $158.65 million, and Yongqi Silicon Materials with $112.16 million.

China is the second most active overseas investment destination for domestic individual investors after the United States, but the stock market environment this year is not bright. The reason is regulation. The Chinese stock market has experienced a sharp decline due to government regulations on 'Big Tech' companies. Recently, regulations have expanded to include ride-sharing services, e-commerce, media and entertainment, gaming, and healthcare. Evergrande's default risk is also attributed to the company's excessive leverage and poor debt management, but the Chinese government's strong measures to curb overheating in the real estate market have also played a role.

Lee Kyung-min, a researcher at Daishin Securities, said, "President Xi Jinping presented 'common prosperity' as a new policy direction at the Central Financial and Economic Affairs Commission on August 17," adding, "The strengthening of regulations on Big Tech and platform companies and the implementation of strong regulatory policies on real estate developers reflect the Chinese government's intention to mitigate and resolve side effects such as wealth disparity and growing social discontent. Therefore, it is highly likely that the government will tolerate Evergrande's default." He further noted, "If the default materializes, it cannot be ruled out that it may cause systemic risks to some extent in the Chinese financial market."

Park Sang-hyun, a researcher at Hi Investment & Securities, also said, "Considering the Chinese government's massive corporate regulatory moves represented by common prosperity and its strong determination to curb overheating in the real estate market, despite some shocks, the government is likely to accept Evergrande's bankruptcy," adding, "There could be a chain of bankruptcies among small and medium-sized banks, and the cooling of the real estate market will negatively affect the financial market and the economy."

Accordingly, the securities industry emphasizes that a correction in the Chinese stock market seems inevitable, requiring a cautious approach. Yoon Ji-ho, head of the research center at Ebest Investment & Securities, stressed, "The Chinese stock market is shaken due to regulations, making the situation challenging," emphasizing the importance of risk management. Jeon Jong-gyu, a researcher at Samsung Securities, also advised, "Liquidity tightening that began early this year and rising regulatory risks from the Chinese government are expected to peak in policy risk by October," recommending, "Focus on risk management and selective, concentrated investment is necessary." Min Byung-gyu, a researcher at Yuanta Securities, stated, "The Chinese government's efforts (regulations) to solve social and economic problems are not expected to end in the short term."

This content was produced with the assistance of AI translation services.