Chinese real estate giant Country Garden has suspended trading in over ten
onshore bonds, leading to a sell-off in its Hong Kong-listed shares and
impacting other stocks linked to China’s struggling property sector. The
company, formerly China’s largest developer by sales, is reportedly
considering debt restructuring following a warning of substantial losses in
H1 2023. Taken in conjunction with the challenges faced by peer Evergrande
which reported losses of over $81 billion in 2021 and 2022, the ongoing
crisis in China’s real estate industry seems to be exacerbating.
The real estate sector’s woes stem from a liquidity crisis triggered by
weakened buyer demand, hampering China’s post-pandemic economic recovery.
While the government has yet to intervene and rescue distressed property
firms, calls for increased support from Beijing are intensifying.
China’s economic rebound from COVID-19 has stumbled in recent months due to
both domestic and international demand slumps. Data reveals China’s
consumer prices experienced their first annual decline in over two years in
July, compelling policymakers to consider additional measures to stabilize
the economy. Despite such pledges, the lack of detailed plans has left
investors disappointed.
Country Garden’s predicament has far-reaching implications, potentially
affecting homebuyers and financial institutions. The company’s shares
plummeted by 18% to an all-time low upon the suspension of its onshore
bonds. This setback compounds the challenges faced by policymakers working
to restore confidence in a faltering economy, with other issues, such as
delayed payments on investment products, further eroding confidence.
China’s central bank’s unexpected move to lower key interest rates signals
concerns about a worsening property market and weakened consumer spending.
The People’s Bank of China reduced the one-year loan rate by 15 basis
points to 2.5%, along with a 10-basis point cut in a short-term policy
rate. This surprise action preceded disappointing economic data for July,
revealing a broad decline in consumer spending, industrial output, and
investment, accompanied by a rise in unemployment.
The National Bureau of Statistics acknowledges insufficient domestic demand
and a need to strengthen the economic recovery’s foundation. These
circumstances compelled China to pursue substantial and unusual rate cuts,
given underperforming indicators despite rate reductions in June.
China’s economic uncertainty and debt problems are causing global concern,
as evidenced by declining stocks and bonds. While policy makers’ rate cut
aimed to reassure, it ultimately heightened anxieties about growth recovery
efforts.
Source: TradingView
Investors are navigating challenges including a hawkish Federal Reserve, a
slowdown in China, and issues in emerging markets, after a record-setting
first half in stock markets.
The iShares MSCI China ETF has been trading in a steep down trend since
February 2021 which at this juncture remains intact. The initial enthusiasm
about China’s economic recovery waned and the market has been sliding since
the onset of 2023. Selling pressure has intensified over the past two weeks
and price action appears headed for a re-test of $42.58. A subsequent break
below this level would have bearish implications in the short-term and
could trigger an extension of the decline to the range of $36.00 and
$38.00.
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