The US Federal Reserve Bank warned last week that stresses in China’s property market could impact the US, “strain global financial markets’’ and “pose risks to global growth.’’
Its warning flowed from the stresses in China’s $52 trillion property industry and in particular the $305 billion debt mountain accumulated by the teetering developer Evergrande. Those stresses have caused a ‘’vortex of fear’’ in the bond market, warnings of financial sector contagion and even, say some, the risk of a Lehman Moment.
The AF China Bond 50 Index shows a different story. The orange line in the chart (above) represents China Bond 50’s Financial subindex. It’s a picture of tranquility, indicating that the nation’s financial industry is standing strong amid the threat of systemic contagion from Evergrande and broader property industry indebtedness. That’s despite a series of coupon payment misses by Evergrande as it stumbles from deadline to deadline, and despite defaults by companies including Fantasia, Modern Land and Sinic during the past month.
While China Bond 50 contains no property industry companies, the yellow line in the chart shows that its Construction industry subindex has also been steady for the past month after an earlier stumble. There’s a tad more pressure indicated on construction companies but, again, nothing that indicates significant contagion. Altogether, this indicates that what Goldman Sachs calls China’s policy of “doing just enough’’ to contain contagion risks is working. For now at least, policymakers are balancing well the deleveraging of the economy against the risk of contagion.
“China’s policymakers have zero tolerance for the emergence of systemic risks,’’ said head of Asia Credit Strategy Kenneth Ho in a research note last week. “Property concerns are closely watched, and likely reflect a desire to prevent further deterioration.’’
There is likely more turbulence ahead though. Evergrande’s humongous liabilities include about $20 billion in outstanding dollar bonds. Goldman’s Ho says $6.1 billion of high-yield property bonds will mature in January, and adds that unless market conditions improve “refinancing may be challenging for many of the issuers.’’
The economic outlook also has darkened with economists at Bank of America downgrading China’s growth forecast for next year to just 4%. While banks’ exposure to Evergrande is limited, UBS estimates their lending to the property sector overall is about 50%, including direct exposure and loans collateralized by land and property. Even factoring in some policy easing, it estimates property sales and new starts will decline 10% next year while property investment will drop 5%.
“The property downturn will weaken local government finances, consumer spending and demand for heavy industry products,’’ said chief China economist Wang Tao in a November 9 note. ”The property downturn will weaken local government finances, consumer spending, and demand for heavy industry products.”
•By Kevin Hamlin and Richa Gandhi