China’s property market is beset again with uncertainty, as ructions around missed bond coupon payments from the country’s largest developer by sales, Country Garden, stoke credit and cash concerns.
Country Garden was perceived as the safest developer financially, but now memories of the Evergrande fiasco, which occurred two years ago, are being invoked. The Chinese property sector has defied concerns over indebtedness and oversupply for years. Now in a post-covid environment, the chickens are seemingly coming home to roost.
There are also rising concerns over the country’s shadow banks or trust companies which represent a USD 3 trillion dollar sector, larger than the entire Australian economy.
Investment trusts or shadow banks traditionally have a high exposure to real estate and one major trust, Zhongrong International, has missed its repayment obligations on some investment products.
Weaker economic data are compounding concerns. Lower-than-expected July Chinese retail sales and industrial output confirmed an ongoing slowing economic growth, and the China Bureau of Statistics announced they will stop releasing the youth jobless data from August (youth unemployment was last seen at above 20%!). Hiding the facts is never a good look, and will further reduce confidence in the Chinese administration’s credibility.
Pre-empting this data, the Chinese Central bank cut key policy rates for the second time in three months.
The Chinese authorities are facing multiple problems, including US sanctions, under-employed youth, an overly indebted property sector, declining exports, reduced inward investment and a fragile consumer post-Covid lockdowns.
The effect on Australia is significant, with weaker commodity export prices to contend with, and a falling AUD – viewed by some global money managers as a convenient proxy to trade on China weakness.
Source: Trading Economics
The chart above shows that the major Chinese stockmarket index is back at the same level it was in December 2014. The US stockmarket has doubled over that same period, whereas the Australian market has risen by around 40%.
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