28/09/2023 China’s over-leveraged property companies are once again hitting
the headlines. But not, yet, hitting stock markets. That is likely to change now that
everyone is back from holidays (this summer was the first in four years with no
Covid-related border restrictions) and as the steady drum beat of Chinese woes increases. In
August, Country Garden, one of the largest Chinese property developers, had to
pull
a share sale
after it
warned
of huge losses
and
missed payments
on two of its international bonds. It
managed
to make
payments in those USD bonds within hours of the expiration of a grace period and since then
its creditors have
agreed
to extend the
terms on a number of its onshore bonds. But that doesn’t mean it – or the property sector –
is out of the woods.
On
the 15th of September, property developer Sino-Ocean
suspended
payments on
all its offshore debt. Then another property business, China Oceanwide Holdings,
declared
its
bankruptcy on 25th September. As is often the way, there are cross shareholdings
that spread contagion through the system. The bankrupt business is a major shareholder in
China Minsheng Bank, one of the country’s large second-tier banks, and the
founder
of China
Oceanwide
sits
on its board of
directors. And then came along the poster child for China’s property perturbations:
Evergrande. At the end of August its shares
re-opened
for trading
on the Hong Kong Stock Exchange for the first time in seventeen months – only for the share
price to fall 90% as creditor talks were postponed. Despite working on a debt restructuring
plan during that period, they still haven’t come up with a solution. On Sunday 24th
September they
announced
that an
ongoing investigation into its main domestic subsidiary would mean it was unable to issue
any new debt. The government can intervene almost however and whenever it wants. It is
therefore notable that its actions have been relatively muted. A few regulations have been
eased
such as
reducing
deposits but the tweaks to mortgage rules only served to deliver a very short-term jump in
housing sales that have already run out of steam. According to
Bloomberg
, “Even
in Beijing, which reacted the most to the stimulus, sales of existing homes plunged 35% to
about 1,700 units last weekend from 2,600 in the weekend immediately after the easing”.
There have been no changes to Loan Prime Rates. This suggests that the government is acutely
aware the Yuan is already under pressure, not to mention that its banks need to preserve
their net interest margins. Lowering interest rates would only risk making both of those
issues worse. And it’s not just the property sector that is struggling. The economy,
hamstrung by the obsession with Zero Covid, has failed to rebound. Youth unemployment hit
such high levels
in
June, at 21.3%, that the government decided to
stop publishing
the
statistic. There is
barely
any inflation
either in
consumer prices
or
producer prices. The much heralded reopening of Chinese borders has had little impact – the
Chinese comprised a third of tourists to South-East Asia before the pandemic but as of
August they
only accounted for
8%
of the total. All of this leaves President Xi,
unconstitutionally elected
to a third five year term earlier this year, very much consumed with domestic concerns.
Hence he
did not travel
to the
recent G20 in India. There has also been the spate of senior officials mysteriously
disappearing
, with
the ex-Foreign Minister last seen in June and the Defence Minister last seen in Beijing at
the end of August. China is an opaque economy but it is clear that all is not well. More
importantly, it is clear that the government is not about to unleash the stimulus bazooka to
paper over the cracks. If they could, they would have done so already, before the cracks
became so apparent. The problem is that a huge stimulus creates bigger political problems
down the road. If the asset-rich get richer then inequality increases, raising the risk of
social unrest. They have to keep the show on the road enough that the whole economy doesn’t
collapse, but they can’t pump up the bubble forever or the political system will end up
collapsing anyway. This means that we should expect more cracks to appear but only little
tweaks by the government in response. The Chinese economy isn’t going to come to a crashing
halt but the authorities are mainly concerned with buying time. But a tremor in China would
be enough to cause a ripple effect through the rest of the world’s financial system. Western
nations have been indulging over the last three years in a variety of interventions to
prevent a recession not only from happening, but from being priced into the markets. This is
unsustainable. The sheer scale and speed of interest rate increases from the Fed, the Bank
of England and the ECB have begun to bite in the real economy. Once risky assets re-price
for this reality then financial conditions will tighten, exacerbating the withdrawal of
liquidity. With investors having piled into China on the anticipation of a post Covid
rebound, it will not take much for the money to move back out. Markets are sitting on a bed
of tinder. It only takes one match to light the fire. China could be the spark. 
Helen Thomas
CEO of BlondeMoney
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