Any contagion from the ongoing turmoil sweeping China's heavily indebted property sector will impact not the banks, which are all state-owned entities and whose exposure to insolvent developers can easily be patched up by the state, but the property sector itself, which as Goldman recently calculated is worth $62 trillion making it the world's largest asset class, contributes a mind-boggling 29% of Chinese GDP and represents 62% of household wealth.
Remember: for China this is not about Evergrande, it's about preserving confidence in the property sector.
Quantifying this dire scenario, Goldman envisions a China where new property starts tumble 30%, completions drop 10% alongside sales volumes and ASPs.
It didn't take long for the market to notice what is going on and otherwise healthy property developers, which are in far better financial health than Evergrande, promptly collapsed: China Jinmao Holdings plunged as much as 10%, China Overseas Grand Oceans Group tumbled -7.9%, Sunac -3.7%, Country Garden Holdings -3%, Agile Group -2.8%, and so on.
As Bloomberg writes, Chinese property firms "May face a wave of defaults" next year if China Evergrande Group's deepening debt crisis shuts access to a key source of funding and conditions don't ease for heavily indebted borrowers.
As we have documented extensively in the past month, there's growing alarm that the liquidity crisis at Evergrande will spill over to other developers as President Xi maintains measures to cool the property market while maintaining China's "Three red lines" rules on property sector leverage.
If the broader population loses faith in what is China's biggest asset while the market waits for a resolution - something the latest sales data confirm is already taking place - then the consequences will be catastrophic.
Sunday, October 10, 2021
"Catastrophic" Property Sales Mean China's Worst Case Scenario Is Now In Play
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