The systemic danger in the property sector and early indicators of Japanification pose a threat to the economy and relationships of the country. Despite the attention paid to how Russia’s economy is in difficulty, isolated, and hammered by western sanctions, China, Russia’s most significant partner, is also experiencing major tremors. No other large country is experiencing more economic difficulties.
Financial stress flowing from China’s property industry has exploded to unprecedented heights in recent weeks; it destabilized an already fragile economy and made it less likely that Beijing would enthusiastically support Russia’s invasion of Ukraine.
Investors Reluctant to Invest
Big Chinese lenders are reluctant to issue fresh loans, unsure if the ailing property developers are just illiquid and short on cash or bankrupt and unable to survive. Because it’s been difficult for the developers to raise funds at home. They’ve had to borrow money at expensive rates from overseas. The difference between high-yield bonds and government bonds in the offshore Chinese market has reached 3,000 basis points, the highest level since the financial crisis of 2008.
Property is crucial to China’s economic development. The property market accounts for around 25% of GDP and 40% of bank assets in China. Estimates of the effective default rate on high-yield bonds are close to 25%, a record high. Although China’s reliance on foreign money is substantial, foreigners sold off local currency government bonds at an unprecedented rate in February, more than double the previous monthly high.
These fears resemble those that plagued the US financial system in 2008 when lenders couldn’t predict which major debtors would survive the crisis and credit markets froze. Chinese leaders appear to understand that clashes will further destabilize financial circumstances.
Liu He, China’s top economic advisor, has attempted to soothe markets by addressing worries about the government’s handling of difficulties in the property industry, the regulation of giant digital platforms, an increase in COVID-19 cases, and other issues. His remarks relieved financial markets, but the systemic risk in the property industry remains high.
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