The sense of uncertainty overhanging the Chinese property market thanks largely to the Evergrande crisis hit global markets hard this week, as everyone wondered if the massive China property developer was going to default on loans and trigger a China, and hence global, financial crisis. By the end of the week, there was a sense that the danger has passed, if it was ever there. But the roller coaster ride was most instructive in terms of the extent to which an economic sneeze in China is viewed as now having the capacity to cause a global cold. Not perhaps the best metaphor in these COVID-19 pandemic days.
So what is the Center going to do about the second-largest property developer with debts amounting to more than $300 billion, and hundreds of projects under construction around the country with creditors and apartment purchasers lined up to get their money back? The indications at week end were that Those in Command have either decided not to bail out the company in toto, or have been unable to find a company or mechanism that would allow that to happen. An article in the Wall Street Journal said local governments had been told that they should prepare to sort out situations with regard to local constructions sites at their own level. But what does that mean? What is the risk of people gathering to seek recompense? And what does it mean for all the other property developers that are not so high profile, but are facing a similar situation? This is all new territory.
The upshot of it all is that Evergrande is not a Lehman moment, and that the Chinese system is almost certainly capable of absorbing the impact of Evergrande’s demise without a meltdown. But in the medium and longer-term the crisis places enormous stress on the ability of the system to maintain balance in the property market and the economy overall, and it has to have an impact on the growth drivers for the future. In all sorts of ways, it will directly impact on property development, which has been the key driver of growth all these years, and also local government revenues. Then how does a shell-shocked property market impact on the system as a whole? We will see. It’s a slow-moving process, but it would seem to be logical that there will be consequences of some sort at some point.
The other story which struck our eye this week was talk of the CEO of Didi Chuxing stepping down, and encouraging other executives to do the same, in advance of what she reportedly sees as a government take-over of the company. Yet another space we are watching.
Enjoy the weekend, however abridged it might be for you.