December 11, 2023 | Markets Have Not Yet Priced New Normal of Slower Growth China

Our September 30, 2021, client letter “Shifting Foundations” highlighted the default of Chinese property developer Evergrande as a turning point in the real estate-centric China growth story with broad implications for the global economy:

China’s property sector has been the largest driver of its economic growth over the past decade and a significant driver of global growth. Concerned about overbuilding, speculation and lofty debt levels, Beijing introduced rules to limit the amount that developers can borrow. This has triggered insolvency in the sector and one of China’s largest property developers defaulted on bond payments to foreign investors this month. The story has broader implications for the global economy, commodities, and especially Canada.

Since 2019, Chinese property shares have fallen about 65% and counting, this month taking out the 2020 crash low to revisit the 2008 financial crisis bottom.

Perma-bullish Wall Street and late-to-act credit rating agencies have only recently been downgrading China’s economic outlook, as discussed in the segment below.

Shehzad Qazi of China Beige Book says the Chinese government’s priority is creating stability, not growth. Here is a direct video link.

After Japan’s legendary real estate bubble burst in 1989, property prices plunged for several years and have not recovered peak prices in the 34 years since. During the mean-reverting process, banks and other financial intermediaries took years to write down bad loans advanced during the bubble.

In related news, see: Housing accounts for an unhealthy 40% of Canada’s GDP.

Danielle Park December 11th, 2023

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