The Chinese property crisis is the consequence of a slowing Chinese economy and is hitting local companies as well as triggering worldwide anxiety over potential contagion.
What is happening in China
Companies in China continue to miss payments to their lenders and struggle with significant debt. Amidst the falling sector-wide prices, the Chinese property giant Evergrande experienced its share prices falling by 21 per cent on Monday after missing another debt payment. The company has previously defaulted on $300 billion of debt in 2021.
Evergrande has also filed for U.S. bankruptcy and is now worth just 5.3 billion Hong Kong dollars, while back in 2017, it used to be worth 420 billion Hong Kong dollars.
Another China-based property development company, Country Garden, has experienced its dollar bonds falling below 10 cents on the dollar. Country Garden`s spokesperson has said that this month the company is expecting to lose up to 7.6 billion dollars. The company has been previously regarded as one of the safest Chinese property developers.
On September 18, a Bermuda court ordered the liquidation of Chinese property company Oceanwide’s assets due to the company’s inability to pay off debt.
These developments are starting to spread through the Chinese financial system, in particular the banking sector. China’s Minsheng Bank, where Oceanwide is a shareholder, has filed a lawsuit against the company, as it was also unable to pay off debt to the bank.
Commodity prices are reacting to the news in China with declines in major base metals. Chinese Iron ore prices fell 4 per cent on Monday, creating further ripple effects across financial assets.
Li Daokui, a former People’s Bank of China adviser said in an interview with Bloomberg that property sales will take up to a year to recover.
“The property market will come back as an important driver for the economy, however the magnitude of the impact of property as a growth engine will be much smaller,” he said.
Worldwide spill-over effect
China has been a major driver of global economic growth, responsible for more than 40 per cent. Now, as the crisis looms over the country and the growth rate drops, most European stock market indices are susceptible to headlines from the Chinese property sector.
A weakened economy in China will mean less demand for oil and other natural resources, which has significantly hit UK-listed companies such as Rio Tinto and Anglo American again on Tuesday.