The Downturn in China’s Real Estate Market
The downturn in China’s real estate market has raised concerns about potential defaults by developers, posing a significant risk to Chinese banks and potentially affecting global markets.
Faltering Giants and Falling Property Prices
Faltering giants like China Evergrande Group and leading player Country Garden Holdings have led to a cooling of housing sales. Falling property prices could push real estate companies into negative net worth, particularly if the value of their unfinished properties plummets.
Potential “Cross-Default” on Debt
Last month, Country Garden warned investors about the potential for a “cross-default” on its debt—where a default on one loan triggers automatically due to a missed payment on another obligation. The company had 1.36 trillion yuan ($186 billion) in liabilities at the end of June, with roughly 10 per cent believed to be held by foreign investors in forms like dollar-denominated bonds.
Financial Risks and Bad Loans
According to JP Morgan, the developer faces at least $2.5 billion in interest payments and maturing bonds this year, though it has managed to secure enough funds thus far to avoid default. China Evergrande Group, which filed for bankruptcy protection in the US last month, has encountered difficulties in restructuring its foreign-currency debt.
Financial risks have already manifested. Bad loans to the real estate industry at 32 major Chinese banks surged 44 per cent year-on-year to 290.1 billion yuan by the end of June, according to Asia Nikkei’s calculations. Regional banks are feeling the impact, with institutions like Bank of Gansu and Bank of Jiujiang seeing their bad real estate-related debts double in just six months.
Goldman Sachs estimates that banks hold about 75 per cent of Chinese developers’ financial liabilities, potentially exposing them to roughly 1.2 trillion yuan in losses on this debt. Small and midsize institutions with fragile capital bases may face liquidity shortages, as per Goldman’s analysis.
Risks of Local Government Financing Vehicles
Local government financing vehicles also present major risks. These investment companies have flourished, largely due to an implicit guarantee of repayment by the local authorities backing them. However, a drop in revenue from sales of land usage rights—a crucial income source for local governments—has raised concerns about these hidden debts.
International Investors’ Cautious Approach
International investors are taking note of these risks and are becoming cautious about investing in China. Foreign traders sold a record 89.6 billion yuan worth of Chinese stocks via Hong Kong last month. Canada’s largest pension fund has suspended investments in China.
Repercussions for Asian Economies
A slowdown in China’s economy has repercussions for other Asian economies closely linked through trade and investment. In July, Japan’s overall exports fell year-on-year for the first time since February 2021, largely due to a decline in shipments to China.
Barclays predicts China’s real domestic product growth for this year at 4.5 per cent, missing the government’s target of around 5 per cent. It has also revised down growth projections for Asian countries including Thailand, Singapore, and the Philippines, citing challenges stemming from China’s economic downturn.
The Chinese Communist Party’s Politburo expressed concern over China’s financial situation in its July meeting but has thus far implemented only limited policy measures in response.