A Chinese property debt bubble is looming, and the world is feeling it. 🌏
It’s no secret that China has been on what seems like an endless building spree. After all, the East Asian superpower builds entire cities on speculation in hopes of spurring economic development in otherwise forgotten territories. At the same time, growth in the country’s megacities hit record levels, driving demand for housing.
The Chinese government recognized the need to build apartments and, in its fashion, enlisted the murky private sector to meet those goals. Unfortunately, like all bubbles, the excess can take a toll.
Last Friday, investors in China (both in the country and those abroad with an interest in the market) started fearing the worst: the beginning of a debt-fueled property bust was looming on the horizon.
Since then, it’s become clear that Evergrande Real Estate Group -- the country’s largest developer - is in dire financial trouble. As of this writing (Monday evening 20/09), the firm owes lenders over 300 billion USD. (For reference, that’s a bit under one-quarter of the entire Spanish economy by GDP).
As demand for property skyrocketed, Evergrande borrowed astronomical amounts from investors by issuing bonds. Bonds are loan contracts that investors trade with each other.
The company does not have enough income from property sales and rents to pay investors the cash they expect. At the moment, they’re trying to offer properties to their creditors instead of money. Additionally, there is talk of either a restructuring or even a bailout by the Chinese government.
Whatever measures taken might not be enough. For many investors, the company’s financial problems could indicate broader weakness in China’s property sector.
Indeed, the share prices of other Chinese real estate developers are also in the red. There are fears, too, that China’s banks will suffer since a slow down or collapse of a property developer means fewer mortgages and home insurance to sell.
If you’re watching the exchange rates, you probably noticed the dollar gaining strength the past couple of days. Evergrande is one of the key reasons for the greenback’s rise.
When the global economy looks weak, investors generally park their money in the United States.
When that happens, demand for dollars goes up, and so too does the exchange rate. Unfortunately, the search for a haven in America might only be temporary.
Evergrande’s warning flag is currently causing a sell-off of stocks and cryptocurrencies around the world. We’ll be keeping an eye on how this story develops over the week.