The stock market took a hit on Tuesday due to concerns over China’s troubled real estate sector and discouraging trade data. This sector has long been burdened with excessive debt, a problem that initially shook markets two years ago.
Back then, the potential default of major developer China Evergrande sent investors into a panic. Currently, the market is once again shaken by the woes of a single developer.
According to The Wall Street Journal, Country Garden (ticker: 2007.H.K.), now China’s largest developer, has defaulted on interest payments for $1 billion worth of debt. Consequently, Country Garden’s corporate bond prices plummeted and its stock experienced a 14.4% decline in Hong Kong trading, dragging down the Hang Seng Property Index by 2.5%.
Over the past couple of decades, China’s real estate sector accumulated massive levels of debt to fuel rapid expansion. However, the industry’s financial problems have been catalyzed by an economic slowdown caused by the pandemic and propelled by the government’s zero-Covid policy. Country Garden’s default serves as the latest example of this ongoing crisis.
Despite expert predictions of an economic rebound following China’s relaxation of its Covid policy in the previous year, growth has been disappointingly sluggish. The most recent trade data indicates a rapid deceleration in domestic consumption and a significant decline in exports. As a result, the manufacturing sector is now facing immense pressure.
Amplifying Concerns for China’s Property Market
By Jack Denton
Chinese property developer, Country Garden, has become a cause for concern, according to Marios Hadjikyriacos, an analyst at broker XM. The company has cited “liquidity stress” and has attributed its struggles to a worsening sales backdrop, reigniting fears of a potential default.
While the Evergrande shock in 2021 was an isolated crisis within a single sector, China is currently facing numerous pressures both internally and externally within its financial system. As a result, investors have lost confidence in the government’s plans to revitalize the economy.
Acknowledging the government’s efforts to counteract the economic slowdown, Hadjikyriacos states that investors remain unimpressed by the scope and size of the stimulus measures. These policies seem to lack the necessary firepower to truly ignite growth. Moreover, concerns are mounting over elevated debt levels, particularly in the private sector.
In addition to the property market concerns, Chinese markets are also keeping an eye on key inflation data and the upcoming earnings report from corporate giant Alibaba (BABA).