China Property Market Woes Spark Fears Of 2008-Style Global Recession Led By China Slump

Continued troubles in the real estate sector in China are scaring investors in Hong Kong and leading to talks of a potential China property-led global market rout.

Markets in Hong Kong and China were sharply down Monday on news that the mainland’s fourth-largest property developer cancelled a creditor’s meeting to discuss its debt repayments. Hang Seng Index was 1.8% lower at 17,739 after morning trading while China’s CSI 300 Index was off 0.7%.

China Evergrande Group Limited EGRNF, the beleaguered Chinese property developer, said Friday that it was cancelling a creditor meeting scheduled early this week. It said that “sales had not been as expected”.

The announcement is the latest in a series of scandals to hit the Chinese financial behemoth. Mid-September, the domestic regulator approved a 50% sale of its insurance business China Evergrande Life into a special purpose vehicle owned by the Chinese state to free up cash. Then last week, staff in the company’s wealth management division were detained by Shenzhen police.

China Evergrande has 778 developments in its stable, making it China’s fourth-largest. Sunac China Holdings Limited and Longfor Group Holdings Limited LNGPF are slightly larger in size by total developments and Country Garden Group Limited CTRYF is China’s number one property developer, with 3,121 developments throughout the mainland.

Shares in China Evergrande were down as much as 25% mid-day while the sector overall was off 6%, the most since December last year. Country Garden was 7% lower. China Aoyuan Group Ltd, which in July sought approval to refinance as much as $5.9 billion in foreign currency debt, led the property sector declines, falling 76% in morning trading.

Bleeding Bad News

The market bleeding was worsened by a string of other bad news from developers Monday. China Oceanwide Holdings Limited said that it faces a winding up order after defaulting on $175 million in principle loan note payments. Oceanwide's shares were suspended from trading Monday on the news. China’s regulator said it is investigating Ping An Real Estate Co., a spin off of the life insurance firm Ping An Insurance Group Co PIAIF while investors are concerned the latest credit contagion will catch on to Country Garden, which has already said it is feeling the squeeze.

Junk dollar debt, a type of junk bond for the Chinese real estate market, hit new lows at 15 cents on the dollar. Junk dollar debt issued by Chinese real estate firms consistently returned 9% plus per year between 2010-2020, and was a popular savings tool for investors. In the past two years, prices have collapsed around 75%.

While the Chinese government has plenty of cash on hand to provide liquidity stimulus if needed to its domestic property developers, so far Xi Jinping’s government has been reluctant to encourage the speculative excesses of the market that were the hallmark of the country’s last 30 years.

However, as part of a series of steps to shore up the local economy, China is now easing controls on the amount of capital that foreigners can invest in its local financial markets in Beijing and Shanghai. Last year, it provided support for billions more in junk bond issuances by property development firms, a trend it is expected to continue. The country’s government has also loosened curbs on property purchases nationwide, although this is unlikely to boost new home sales much, Fitch said in a note Monday.

“The recent wave of policy easing in China will have a greater impact on existing homes for sale but is unlikely to propel sales of new homes on a sustained basis,” wrote Fitch Ratings analyst Karl Shen.

“Developers with significant landbank in lower-tier cities or non-core districts of mid-tier cities are likely to face anaemic new home sales and negative operating cash flows for a prolonged period.”

A 2008-Style Meltdown Looming?

Woes in the Chinese property market are sparking talks of a 2008-style banking crisis that could spill over to the rest of the world. Chinese growth accounts for 35% of the world’s growth, nearly three times the amount of growth in the world’s next-biggest markets, India and the western hemisphere, according to data from the International Monetary Fund (IMF).

Further, many of the conditions in China now parallel those in the US housing market more than a decade ago.

Much of the Chinese property bubble was caused by developers using revenue from new home sales to invest in other plots of land without completing existing developments, according to local reports. When the country’s premier Xi Jinping put lending restrictions on new home purchases at the start of 2017, property developers felt the pinch. Country Garden’s stock, for example, has declined 93% since its April 1, 2018 high.

Eighty percent of Chinese household savings are in the property market. If there is continued cooling in China’s domestic market, this could translate into risk adverseness by global banks which fear the impacts of declining growth from China.

“The problem China has now is a deep-seated structural one,” Rob Subbarman, head of global research at Nomura said on Bloomberg TV.