For all the excitement stirred up in China’s market by the recent GDP numbers, some global investors believe that the fortunes of the property market hold more significance to China than a few encouraging numbers.
They say the property sector’s continuing woes are also exacerbating the vulnerability of the second-largest economy to external shocks. This is especially worrisome given the close link between property and household consumption and the critical role that consumption plays in boosting Chinese inflation.
“Although most domestic investors see PPI [Producer Price Index] as the key data point to watch for China’s economy, many global investors believe the property market is more important to China. The property market is correlated to household consumption in most countries, and consumption recovery is the key to boosting Chinese inflation,” said Jefferies in a report on April 21, which was viewed by The Epoch Times.
According to the investment banking and capital markets firm, global investors believe that if the feared property sector defaults were to occur, it could “break China’s back.” Smaller financial institutions are already at risk due to potential events in 2024. Jefferies said that larger national financial institutions may also experience adverse effects if major property companies default.
In January, a Hong Kong court ordered the liquidation of real estate giant Evergrande Group after the developer failed to reach a restructuring deal with creditors over liabilities exceeding $300 billion. At the end of February, a liquidation petition was launched against Country Garden, once China’s largest developer, for failing to repay a loan worth nearly $205 million.
In March, China’s property crisis worsened as Vanke, another major developer with state links, was hit by a confidence crisis after ratings agency Moody’s downgraded the company and estimated a 40 percent decline in sales for January and February compared to the previous year.
Sliding sales and plummeting prices are increasingly straining property developers. Sales of the top 100 developers reportedly plummeted by 49 percent year on year in the first quarter of 2024. The year-to-date property sales volume in 30 cities is equivalent to 39.4 percent compared to the same period in 2021.
Similarly, the March 2024 PPI recorded a year-on-year decrease of 2.8 percent, which was narrower than the previous month’s decline. This indicated a potential stabilization of product prices at the factory gate. For domestic investors, the decrease in PPI suggests lower costs for products leaving factories, which could lead to improved profit margins for companies able to maintain or increase their sales prices.
During the initial weeks of the year, there were doubts about achieving such significant growth; investors were withdrawing, and officials had to intervene in equity markets to prevent further decline.
The Vanke Factor
Nevertheless, from the global investors’ perspective, “Vanke is a key story to watch in the near term,” said the Jefferies note.Like Evergrande and Country Garden—both in danger of liquidation due to debt default—Beijing is attempting to save China Vanke from the same fate as the country’s failing real estate industry.
If authorities intervened and bailed out Vanke, it would be seen as an unconventional stimulus, indicating substantial support for the property market and developers. But if Vanke defaulted on public debt, concerns would undoubtedly escalate, even regarding the most reputable state-owned enterprise developers.
This could also lead to increased risks in the financial system, particularly in terms of exposure to the property market and the industry chain, according to Jefferies.
According to Bloomberg, Vanke—the country’s second-largest developer by sales with total liabilities of 1.28 trillion yuan (about $178 billion)—has several debt liabilities expiring this year, including a $600 million note due in June.
‘Plenty of Concerns’
“There are plenty of concerns [despite this year’s better GDP numbers],” noted Moody’s in a commentary on April 22, viewed by The Epoch Times, adding that the divergence in fortunes between households and the manufacturing sector is growing.“There’s a growing divide in China’s economy; manufacturers are doing the heavy lifting, while households sit on the sidelines,” wrote Moody’s analysts.
According to the global ratings agency, much of the positive news about China’s economy comes from the manufacturing sector’s “new three” industries: electric vehicles (EVs), solar panels, and batteries.
Chinese officials have made substantial investments to support these strategic industries, and as a result, they are now reaping the benefits as production ramps up and exports, particularly EVs, surge. This is happening despite a general decrease in global demand.
However, this manufacturing strategy does come with risks. In the United States and the European Union, there is growing concern that China’s overcapacity in these next-generation industries is flooding the global market and adversely impacting Western industries.
Recent comments by U.S. Treasury Secretary Janet Yellen during her visit to China emphasize Washington’s willingness to impose tariffs if necessary. If this were to happen, China’s manufacturing success in these areas would lose some of its shine.
On the other hand, retail sales growth has slowed over the past six months as households have reduced their spending on non-essential items. This slowdown was particularly pronounced in March, with growth slowing to 3.1 percent year-on-year compared to 5.5 percent in January and February combined.
Spending on services has also slowed, as pent-up demand has now been largely satisfied.
“This is why it’s so important for China’s households to come to the party; without them, the economy is vulnerable to external shocks,” the Moody’s note concluded.
