China’s real estate industry is in crisis and there are fears that the Chinese troubles might spread outside the country’s borders, at a time when the world is grappling with the Ukraine-Russia war and inflation, writes eToro analyst for Romania, Bogdan Maioreanu.
But so far the world seems to look more to what Central Banks are doing and hopes the interest rates will stop growing before causing a global recession.
China is ‘the world’s second largest economy and its real estate sector was long seen as a vital growth engine and accounted for as much as 30% of the country’s GDP. The country has been grappling with a real estate crisis in the private sector, but now the crisis appears to be spreading to government-backed companies.
China’s state-owned property developers are warning of widespread losses: 18 out of 38 state-owned enterprise builders listed in Hong Kong and in the mainland reported preliminary losses in the six months ended June 30, up from 11 that warned of full-year losses in 2022, according to a Bloomberg tally.
This is coming after China’s second largest real estate company, Evergrande filed for bankruptcy in the US. The property company’s debt load reached 2.437 trillion yuan (340 billion dollars) by the end of last year. That is roughly 2% of China’s entire gross domestic product.
This real estate companies debt situation in China is sparking fears that it could lead to a global contagion. China is the world’s largest manufacturer, its second largest economy, and the largest source of global consumption and commodities growth. It accounts for over a fifth of global consumption growth this year.
But recent China economic growth and debt concerns have so far shown a limited impact on global markets, with investors appearing to be more concerned by rising US bond yields and oil prices. One reason for this limited impact is that while China is an economic giant, it has relatively small capital markets. Its stocks are already some of the world’s cheapest, and foreign investors, including Romanians, are already very underweight. According to the latest eToro Retail Investors Beat survey only 3% of the Romanian individual investors are exposed to the Chinese markets.
While the Chinese GDP growth is disappointing, and structurally down-shifting, it will still be among the world’s strongest this year. China has the policy flexibility to address these issues. From high real interest rates and domestic savings to capital controls, state owned banks, and its overwhelmingly local currency debt, the response will likely be measured, and this may be enough given that expectations are so low.
Despite the complex situation in the Chinese economy and real estate industry, the number of square meters of newly started constructions continued to climb in July by more than 14% compared to June.
But the global situation is mixed. Housing starts (new constructions) in the US rose by 3.9% month-over-month to a seasonally adjusted annualised rate of 1.452 million in July 2023, above market expectations of 1.448 million. In Europe the data is showing new constructions increasing in some countries and falling in others. In Romania, gross volume of new constructions increased month on month by 8.2% but with residential buildings decreasing by 1.5%. Year on year, the gross volume of new constructions increased 5.4% with a decrease in residential buildings of 14.5%.
Despite the statistics, 57% of the Romanian investors are not confident in the local Real Estate market, reveals the latest eToro Retail Investor Beat survey. The confidence deteriorated by 5% from one quarter to the other. Also, at global level 54% of investors are not confident about Real Estate markets prospects, which remain under pressure as central banks have been hiking interest rates to fight off inflation.
