Is China headed for a Lehman crisis? This property bust is different.
The housing slump and China’s ailing economy have some wondering if China could be on the brink of its own Lehman-like crisis. While the problems facing China’s economy are significant, they are unlikely to push China into the type of meltdown that sends the country’s financial system into a tailspin.
The debt that fueled China’s housing boom — and therefore its economic growth — has long been a source of concern for long-term investors. They’re not alone: China’s policymakers had been trying to tackle its economy’s debt load – one reason they’ve been much more limited in delivering Covid-related stimulus in 2020 and the reason for the housing crackdown that triggered the current crisis.
But policymakers face a constraint boycott on mortgage payments spread over approximately 300 unfinished projects in 90 cities. The authorities are trying to balance two conflicting goals: maintain a ceiling on – or even reduce – the amount of debt in its real estate sector while helping property developers complete their projects and avoid further social unrest, write the strategists at Pavilion Global. in a note to customers. Real estate developer debt is accumulating rapidly, while net income is shrinking.
Mortgage stays are a different feature from recent housing market jolts, and Eswar Prasad, a former China chief for the International Monetary Fund and currently an economics professor at Cornell University, fears it could coercing developers into even viable projects that end up getting stalled for lack of funding. That could create further ripples in a market where house prices are already crashing and economic uncertainty is high after Covid-related lockdowns led to anemic second-quarter economic growth.
The economic risk is undeniable given that the real estate market is a major driver of growth. Defaults could increase as the liquidity crunch stresses developers and some banks could also suffer, although Prasad notes that many are state-owned and the government can easily inject cash, limiting the risk of a crisis. systemic finance.
Also, unlike the global financial crisis in the United States, the amount of leverage supporting speculative investments is much more limited and high household balance sheets and savings rates act as a buffer, says Prasad. Down payment requirements are also so large that even another significant price drop would not put many mortgages under water, he adds.
“A Lehman moment may come one day, but I’ve come to appreciate how many policy levers they have,” Prasad says. “We will see a lot of stumbles and crashes from lopsided policy responses, but will there be a real Lehman moment when the financial system collapses? I believe not.”
The biggest concern is the hit to the economy. Economists are watching closely how the turmoil in the housing market seeps into consumer sentiment, as real estate is a major source of Chinese wealth.
A People’s Bank of China survey of urban depositors three years ago found that about three times as many people expected prices to rise as prices to fall, but last month 16% expected prices to rise and 16% expected prices to fall. Although volatile, the survey offers a gauge of sentiment among urban Chinese – and it’s clear there’s been a major shift in the way they think about the property market, writes Michael Pettis, professor of finance at the University of Beijing, in a recent note.
Difficulties in the real estate market and the economy in general could weigh on Chinese equities. Domestic A-shares trade at a premium to H-shares in Hong Kong, and leverage as measured by net debt-to-earnings ratios is two to three times higher in mainland China compared to the United States or even in emerging markets outside of China, according to Pavilion Global Strategists. In a note to clients, they said the domestic A-share market offers a better short-term than long-term opportunity for investors.
iShares MSCI China
Stock exchange-traded fund A (CNYA) is down 17% so far this year, a bit worse than the
iShares MSCI China
ETF (MCHI), which is down 15% since the start of the year.
China’s housing rout is not like the one suffered in the United States during the global financial crisis, and Beijing has an extensive toolkit to avoid a Lehman-style crisis, but that doesn’t mean it won’t. will not be messy.
Write to Reshma Kapadia at [email protected]