As China’s property crisis intensifies—triggered by the country’s two best-known developers missing their debt commitments and a trust company delaying payment of maturing wealth products— investor confidence has been rocked again.
Country Garden, China’s largest private real estate developer, is seeking to delay payment on a private onshore bond for the first time—the latest sign of a stifling cash crunch in the property sector—after suspending trading of at least 10 onshore bonds and is heading for a debt workout. Its shares have slipped to a historical low, reflecting its financial distress.
Sino-Ocean Group Holding Ltd., another state-backed developer, has failed to make coupon payments on two-dollar bonds by the initial deadlines, raising the risk of default, while its bonds have plunged to deeply distressed levels of 15 cents or less.
Analysts have warned that a rise in default by trust companies—also known as shadow banks, which have strong ties to the domestic property sector—will further weigh on the world’s second-largest economy.
The events have sparked fears among foreign investors that China’s property sector, which accounts for about a quarter of the country’s GDP, is facing a reckoning amid regulatory crackdowns, COVID-19 outbreaks, and slowing growth.
Foreign investors have reportedly been fleeing China’s bond and stock markets, as shown by the sharp drop in the value of yuan-denominated financial assets held by foreigners in the first quarter of 2022.
Standard Chartered also revealed it had reduced its exposure to about $3 billion from $3.7 billion a year ago.
On Monday, U.S. stocks kicked off the week lower, as investors took a measured stance ahead of key data on consumer spending amid concerns about China’s property sector.
The three major U.S. indices opened lower on Monday, with the Dow Jones Industrial Average down 0.21 percent, the S&P 500 losing 0.17 percent, and the Nasdaq Composite dropping 0.19 percent in early trading. The tepid open came after a decline in global equity markets, with the MSCI world equity index, which tracks shares in 45 nations, last down 0.66 percent.
Since the beginning of February, the yuan has lost 8.4 percent of its value relative to the dollar due to China’s economic downturn, regulatory crackdowns, pandemic measures, and monetary easing.
China’s trade outlook has been impacted by the depreciation of the yuan, which lowers the cost of its exports but raises the cost of its imports and debt repayments. As a result, foreign investors have been wary of holding Chinese assets or conducting business in China.
Commercial and investment banking, private equity, and wealth management are all covered in China’s trust business, which pools customer money to provide loans and invest in tangible and intangible assets like property, stocks, bonds, commodities, and even barrels of sorghum.
‘Vicious Cycle’
JPMorgan reportedly predicted a “vicious cycle” of real estate financing difficulties in a research note published on Monday, stating that mounting trust defaults will directly reduce China’s economic growth by 0.3 to 0.4 percentage points.The new wave of defaults by wealth management businesses on trust-related products is anticipated to generate some major rippling consequences for the broader economy through wealth impacts, according to a separate note from Nomura.
The property crisis in China also reverberated in other Asian markets, as investors have sold off their holdings in regional bonds and stocks to cover their losses or reduce their exposure to China. Barring Vietnam’s HNX 30 Index, Indonesia’s JSX Composite Index, Pakistan’s KSE 100 Index, India’s S&P BSE Sensex, and Thailand’s SET IDX, six other major Asian stock indices, including Shanghai SE and Hang Seng, closed lower on Tuesday.
