The Chinese Debt Crisis is unfolding like a slow motion car crash! As contagion spreads, there will be multiple important payment dates for Chinese Property Developers so we put together a Macro Calendar for you that contains key dates, as well as other important macro economic events, such as Market Trading Hours, ETF dates and Central Bank Meeting dates.
In their biannual Financial Stability Report on the 8th November 2021, the Federal Reserve highlighted a macroeconomic risk. “Given the size of China’s economy and financial system as well as its extensive trade linkages with the rest of the world, financial stresses in China could strain global financial markets through a deterioration of risk sentiment, pose risks to global economic growth, and affect the United States.”
This report was released prior to the most indebted property developer in China, Evergrande, officially defaulting.
China’s Lehman Brother’s Moment
Chinese property developers have gained a reputation for leveraging massive amounts of debt in their business operations. One such company, Evergrande, was particularly over-leveraged and has already begun defaulting on its outstanding debts. There are some signs that this is already starting to result in a market-wide contagion, putting additional pressure on the Chinese economy and worldwide financial markets. The Chinese Debt Crisis is already slowly unfolding. The global financial crisis began in 2006, before the eventual collapse of Lehman Brother’s in 2008. The Chinese Debt Crisis will happen at a similarly slow pace.
In total, Chinese developers owed $5 trillion at the end of Q2 2021 and real estate accounts for slightly over a quarter of China’s GDP – 46% of the debt is bank loans, whilst roughly 10% is from bonds.
The name is Bond. Chinese Bond
A bond is a debt instrument that a company can use to raise money. The terms of the bond, including the interest rate and maturity date, are agreed upon between the Issuer and the Bondholder. The Bondholder lends the Bond Issuer a sum of money for a specific period of time. In return, the Bond issuer agrees to pay periodic interest payments to the Bondholder and repay the principal amount of the loan at maturity.
Bonds are typically issued in large denominations and have maturities that range from ten years to thirty years. Bonds are generally less risky than equity and provide stability for Bondholders. However, bonds are subject to credit risk, which is the risk that the Bond issuer will not be able to make interest payments or repay the principal amount of the loan at maturity.
Bondholders receive periodic interest payments until the bond matures. At maturity, the Bond issuer repays the Bondholder the principal amount of the loan. If a company goes bankrupt before it matures, Bondholders may lose some or all of their investment.
A Big Problem
China’s real estate market is valued at roughly $55 trillion, twice the size of the US real estate market. Due to strict controls on capital in China, 70% of citizens wealth is stored in real estate. As real estate is the main source of investment in China, this has led to extreme speculation in the sector and inflated the Chinese Debt Crisis with excessive leverage. 65 million homes (21%) as of 2017 were vacant. This has led to China having some of the most expensive cities in the world to live in, when measured in years of average salary required to buy an average home. Even with a 65 million home surplus, new properties are paid for in advance – such was the case with the 1.6 million homes Evergrande has yet to complete.
On top of the 1.6 million families unsure if the most expensive purchase of their lives will be completed, Evergrande employs 4 million people including all suppliers and subcontractors, many of whom have not been paid for months. Many completed properties in China’s ghost cities are without electricity, water or windows. Why bother if no one is going to live in them? This is a clear example of bigger fool investing and the hallmark of a bubble. Developers are taking on debt and payment up front to build concrete shells, knowing there is a bigger fool desperate to own some property. People are buying concrete shells in buildings without stairs or elevators, in cities that no one lives in hoping a bigger fool comes along and pays more for the concrete shell.
Experts predict that the Chinese real estate market has already reached its peak, and many Chinese property developers are struggling to maintain profits amidst slowing demand. As a result, these companies are relying more heavily on external funding in order to finance their ongoing projects. Moreover, they are often acquiring and holding excess assets with borrowed money and utilizing high levels of borrowing in sensitive commercial areas. While some analysts view this as risky behaviour that could result in default, others believe that Chinese policymakers are sufficiently prepared to contain any potential financial fallout from such a crisis. Nevertheless, the situation remains volatile and poses significant risks for investors around the globe.
Disclaimer: Nothing within this article should be misconstrued as financial advice. The financial techniques described herein are for educational purposes only. Any financial positions you take on the market are at your own risk and own reward. If you need financial advice or further advice in general, it is recommended that you identify a relevantly qualified individual in your Jurisdiction who can advise you accordingly.