Chart of the Week: Property woes threaten China’s growth

Troubles in China’s real estate sector have been reflected in equity performance recently. Hong Kong’s Hang Seng equity index fell by 1.6% on Monday 14 August, and S&P China property index by almost 2%. Several factors prompted these falls, but among the most immediate was that one of China’s biggest property developers, Country Gardens, defaulted on two USD coupons that were worth $22.5 million, and suspended trading in its 11 onshore bonds. This led to an 18.4% fall in the company’s stock price. The news spilled over to other Chinese real estate developers in the Hong Kong stock exchange, whose shares also registered notable falls. Then on Friday 18 August it was announced that Evergrande, another of China’s property giants, had filed for bankruptcy protection in a US bankruptcy court. The same day, Hang Seng dropped a further 2.1%, and S&P China property index 1.7%. This is bad news for China, which is already struggling with a slowing economy and deflation. China decreased the policy rate (or the medium-term lending facility rate) by 15 basis points to 2.5% on Tuesday 15 August, and the one-year loan prime rate to 3.45% from 3.55% on 21 August, trying to boost economic activity. Evergrande filing for bankruptcy and Country Gardens defaulting on bonds could be early warning signals of an accelerating property crisis in China — a crisis which could further weaken an already lacklustre post-COVID recovery and make it harder for China to reach its 5% GDP growth target in 2023.

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