Is China’s property crisis spilling over into other sectors?

In recent weeks, a string of business developments in China have stoked fears that contagion could lead to a chain of defaults and perhaps even stoke a marked growth slowdown in China with global repercussions

On Thursday, 10 August, Country Garden, one of the few major developers in China to avoid bankruptcy in recent years, issued a profit warning. The next day, its shares fell to record lows, affecting the wider property sector; the Hang Seng Mainland Property Index fell 1.49% the same afternoon. On Monday, 14 August, Country Garden delayed payment on a private onshore bond for the first time.

On Thursday, 17 August, Zhongzhi Enterprise Group – a major Beijing-based asset manager with considerable exposure to the property sector that has a reported RMB 1 trillion (£108.5 billion) in assets – told investors that it needs to restructure its debt. It had already been missing payments on dozens of financial products. Reuters reported that Zhongzhi had hired one of the Big Four accounting firms to audit it.

The same day, China’s property giant Evergrande, which defaulted in 2021, filed for bankruptcy protection in New York. It was also informed by China’s securities regulator that it is being investigated for suspected disclosure violations.

On Friday, 18th August, two Hong Kong-listed property developers, Yuzhou Holdings and Sino-Ocean Group Holdings, announced significant losses for the first six months of the year. Nikkei Asia reported that Yuzhou cited an “unfavourable macro environment and the downturn in the real estate industry”.

Concerns about property contagion – which then extended to the financial economy due to Zhongzhi’s troubles – led several global financial institutions to cut their China growth forecasts for the year. Morgan Stanley, for example, cut its estimate from 5% to 4.7%.

SCMP reported that the Japanese financial services company Nomura gave an unusually pessimistic assessment in a new research report on China, warning that “slumping home sales may lead to a rising number of developer defaults, a sharp contraction of government revenue, falling demand for construction materials, declining wages of employees in the property and government sectors, weaker consumption and faltering financial institutions.”

China has already started to act to shore up the economy, including a 10-basis-point cut in its one-year benchmark lending rate on Monday. The small size of the cut may reflect concerns by the authorities about bank profitability – a key factor in preserving financial stability.

Nevertheless, Nicholas Spiro, a partner at Lauressa Advisory, a London-based real estate and macroeconomic advisory firm, told SCMP that while China’s property sector woes are serious, their potential impact on global markets should not be overstated and that China is highly unlikely to be facing a “Lehman moment”, a sentiment echoed by many other analysts in the industry.

This is partly because state ownership provides banks in China with a degree of protection against problems in other parts of the financial market. Moreover, in contrast to the West, Beijing tends to allow state-owned banks and other financial entities to help absorb troubled companies.

Photo by Karl Groendal on Unsplash