evergrande china

China Property Meltdown Deepens as Evergrande Misses Debt Payment

By:Ilya Spivak

China’s property market woes deepen as Evergrande misses payments, adding to swelling global recession fears

  • China’s property market woes deepen as Evergrande misses a bond payment.
  • Beijing’s stimulus efforts are falling flat, compounding global recession fears.
  • Slight uptick in upcoming China PMI data may be cold comfort for investors.

China continues to struggle with a crisis in its property market, and local stocks are suffering.

The CSI 300 index of Chinese stocks—a broad benchmark tracking the largest firms traded on the Shanghai and Shenzhen exchanges—is on track for the lowest weekly close in almost a year, with prices down 1.22% so far. That’s after another spate of unwelcome news from China Evergrande Group (3333.HK).

The company—until recently, one of the country’s top developers—said its mainland unit defaulted on a 4-billion-yuan bond on Monday. It promised to “actively” negotiate with creditors, repeating a mantra it has been repeating since March, when it missed another payment.

The latest turmoil is compounded by reports that Chinese authorities have arrested Xia Haijun and Pan Darong, Evergrande’s former CEO and CFO respectively. This further complicates a restructuring effort meant to ease pressure on at least $30 billion in offshore debt. The company said it will have to revisit the plan.

Property slump threatens a huge share of China’s economy

Property price growth has been slowing since mid-2019. Home values have been outright falling since April 2022. Data from Bloomberg shows that—after a brief pop just after the reopening from COVID restrictions in December–less than 30% of Chinese cities now report house price gains. That means they are falling across most of the market.

china house prices
Data source: Bloomberg

This makes for a potent headwind. Property commands an outsized part of the world’s second-largest economy, from employing a large swathe of the labor force to dominating investment portfolios. Its size and impact have been estimated at 25% to 30% of gross domestic product (GDP).

Easing of regulations meant to spur housing demand alongside attempts at boosting credit availability have mostly disappointed so far. Lending growth turned positive in August after three months of double-digit losses, but financial conditions remain restrictive, according to data from Citigroup.

China’s woes add to global recession fears

That undermines Beijing’s attempts to bring back growth derailed by China’s belated exit from pandemic-era lockdowns. It also warns of deepening global recession risk as the Europe slips closer to a confirmed recession while the Federal Reserve aims to keep interest rates “higher for longer” in the U.S., cooling growth.

Purchasing managers index data due over the weekend is expected to show a bit of improvement, with the composite index projected to put manufacturing- and service-sector growth at the highest in three months.

Still, values dangerously close to standstill may be cold comfort for investors, especially as Chinese economic news-flow has tended to undershoot relative to forecasts (according to another Citigroup data set). That bodes ill for ETFs tracking Chinese markets like FXI and ASHR as well as linked commodities like copper and currencies like the Australian dollar.

china pmi cflp
Data source: Bloomberg

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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