China's property sector is in trouble. Why it might affect whole world
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
We are used to considering that export is the key point when discussing the Chinese economy. Then why might the housing crisis in China be interesting for somebody who doesn’t have an apartment in Beijing? Well, it can be critical for all of us, actually. Or can not be. Let’s try to figure out what is happening in the Chinese property sector and how it’s able to influence the other world.
China is associated with huge exports and similarly huge production capabilities. But the local housing market is an extremely giant part of the economy. It takes nearly 30% of China’s GDP.
This sector was linked to the country’s economic growth for the last decades. The scale of house building allowed to create jobs and increase the middle class investing in the local economy. Buys of property stimulated it as well. In other words, this chain, with the participation of buyers, workers, developers, Chinese banks, and investment trusts, was the significant growth driver for China.
But things changed. The growth of the population slowed down. After that, strong Covid restrictions added some troubles, you know. Moreover, the local government limited the capabilities of the Chinese shadow banking sector, closely connected with local developers. All these factors led to the situation like somebody pulled the emergency brake for the Chinese economy.
Many experts expected the economy to recover in 2023 when authorities canceled the pandemic restrictions. But it didn’t happen. The local market is in a crisis, and the property sector is in the center.
The supply turned out to be higher than the demand. House prices dropped, but the obligations of developers didn’t disappear anywhere. So, top Chinese house builders are with large debts. Let’s just look at what is happening with some of their stocks.
The biggest Chinese developer, Country Garden, is believed to be approaching the default. And its stocks are approaching the bottom.
The other prominent developer, China Evergrande, filed for bankruptcy in the USA. Also, this stock trading was suspended for 17 months and restarted only at the end of August 2023. You see what happened after that.
Two essential moments here are investment trusts and banks. The first ones frequently put money in the property sector and now struggle with their obligations to investors. The second ones are at risk of staying without money loaning developers.
Who else is in a risk zone? There are Chinese companies’ shareholders, exporters, and firms whose businesses are linked to China. In other words, you know all of us are connected with China because of its economy scale. At the least, it might affect the increase in prices and supply problems. Also, the economies of countries like Australia and New Zealand can feel consequences as well. China was and is a significant export partner for them.
At the same time, the abovementioned doesn’t mean sooner economic collapse in China. The local officials use various measures to stabilize the situation and launch the economy. Maybe they will handle it without huge following troubles. That’s why you need to track news and be ready for changes if you want to profit from economic events worldwide.