Evergrande: Chinese economy threatened by construction, slowing manufacturing and falling economic growth
The crisis in Evergrande is just one of many nightmares facing the Chinese economy simultaneously – and it could put Australia at risk.
Two-thirds of China’s top developers have broken the country’s strict debt policy, raising fears that the Evergrande crisis is just the tip of the iceberg.
According to an alarming new analysis by Bloomberg, two-thirds of the country’s top 30 real estate developers were now grappling with Beijing’s tough new rules.
The controversial “red line” policy was introduced by President Xi Jinping last year in an attempt to curb rising debt levels in the real estate industry.
By policy, liabilities cannot exceed assets, loans cannot exceed the value of common stocks, and companies must have more cash than short-term debt.
The rules have left Evergrande in a mess, with the world’s most indebted real estate company now on the brink of collapse after failing to meet a series of payment deadlines.
But according to Bloomberg, the fiasco is by no means confined to Evergrande, with two-thirds of China’s largest real estate companies now crossing at least one of those red lines as financial pressures increase, with several companies overtaking two.
There are already growing fears that contagion is well underway, with a slew of other major Chinese real estate companies struggling in recent weeks.
In October, Chinese real estate developer Fantasia missed a payment on a $ 206 million (AU $ 282 million) bond that matured the day before, triggering a default.
It came as property management firm Country Garden Services Holdings said a unit of Fantasia failed to repay a 700 million yuan (AU $ 108 million) loan, saying it was likely the company would be lacking.
And in another blow to the ailing Chinese real estate sector, another company, Sinic Holdings, also defaulted on interest payments on debt this month, with Fitch’s ratings downgrading Sinic accordingly.
Now it looks like another company is in trouble, as shares of Kaisa Group Holdings Ltd fell 18% in Hong Kong this week after announcing it might not be able to refinance dollar debt.
China’s “shocking loss”
However, the potential catastrophe facing China’s real estate industry is just one of many economic dilemmas facing the nation simultaneously.
Manufacturing activity fell for the second consecutive month in October, amid real estate problems and severe energy shortages that rocked the country.
On Sunday, data revealed that China’s Manufacturing Purchasing Managers Index (PMI) was 49.2 last month, below the 50-point mark, proving an expansion instead of an expansion. contraction.
This is a further decline from September’s 49.6 and October’s forecast of 49.7.
Meanwhile, data also recently revealed that third-quarter economic growth fell to its slowest pace in a year, with analysts at Gavekal Dragonomics saying the expected post-Covid slowdown has become a “shocking loss of momentum. economic”.
And it will only get worse, with analysts claiming in a research note that: “As the real estate sector is the most important driver of cyclical activity, overall growth will weaken further in the process. [the fourth quarter] and in 2022.
Citi analysts also warned that “stagflation” – a rare situation where the rate of inflation skyrockets while the rate of economic growth slows and unemployment is high – was a growing concern.
“Due to electricity rationing and associated supply constraints, the characteristics of ‘stagflation’ have become more evident and would limit short-term policy options,” analysts said, according to the report. Financial Time.
The Treasurer’s Dark Warning
As China’s problems accelerate, there has been growing speculation it could impact Australia, with Treasurer Josh Frydenberg issuing a grim warning of things to come.
Talk to Australian Financial ReviewMr Frydenberg said the crises plaguing the Chinese economy and the construction industry meant “downside risks” for Australia, especially with regard to iron ore.
“What happens to the Chinese real estate sector from here will be critical as it will impact the construction and finance sectors, and including the indirect effects, it is estimated to contribute more than a quarter. of China’s GDP, ”he told the publication.
“With the Chinese real estate sector responsible for consuming half of China’s steel production, it has already had an impact on the price of iron ore, which has risen from over USD 200 (266 A) per day. ton earlier in the year at around $ 100 (133 A) per ton. today.”
He said that while Australia was “well placed” to cope, the government “was nevertheless following developments in the Chinese economy very closely.”