With the wars in Ukraine and Gaza, and attacks on shipping from Houthi rebels garnering the majority of the mainstream press coverage, China’s real estate and debt crisis are possibly not getting the attention it deserves. The recent bankruptcy of Evergrande is evidence of this, and whether overseas creditors get any compensation could further exacerbate the unwillingness of foreign investors to allocate capital to the Chinese market.
The most likely result of this is the need for China to devalue its currency, in order to loosen financial conditions in the the local banking and debt markets. However, this could result in further pressures from capital flight and market participants alike as it could increase fears of further devaluation.
It’s not yet certain whether the full crisis will emerge this business cycle or one further down the line. If the USA is forced to ease due to local financial or economic conditions, China may get some reprieve. However, it looks like the USA is on the beginning of a growth and inflationary cycle, with the increased 25-54 year old population and household formation for the millennial generation, and the stepping back from subsidizing global growth through hollowing out its own manufacturing sector. While this may not be the historical phenomenon brought about by the Baby Boomers entering the same age, it does mean they we maybe be seeing higher interest rates and a stronger USD, meaning the pressures will steadily increase on the Chinese economy.
If China does devalue the Yuan, but may send a deflationary shock through the international financial system and local economies, and cheaper Chinese goods flooding markets could put pressure on manufacturers in international economies. However, any monetary or fiscal responses to this will likely benefit the U.S. in a similar way to the response to Covid thanks to the favorable demographics, more isolationist policies of the U.S. and being the world’s reserve currency.
CNBC reported that there are extreme numbers of unfinished homes, meaning there is oversupply for decades to come. If these are finished the downward pressure of existing home prices will continue for a long time. If they are not finished, the investors, who have often borrowed to pre-purchase, will have high debt burdens with no corresponding assets. Needless to say something along the lines of Japan in 1989 or perhaps even worse, is facing China for the long term.
There have also been extremely high spikes in short-term rates, highlighting extreme issues in the bank system, as highlighted by this article from Reuters: