China's State-Owned Developers In Crisis: Global Alarm Over Intensifying Housing Downturn

Warnings from China’s state-owned property developers have sent ripples of concern throughout global markets, raising fears that the housing crisis is no longer confined to the private sector but is spreading to government-backed companies as well.

Amid China’s persistent housing slump, previously immune state-owned enterprise builders are now grappling with financial losses.

An analysis of corporate filings by Bloomberg reveals that 18 out of 38 such builders listed in Hong Kong and mainland China have reported preliminary losses in the six months leading up to June 30. This represents a significant increase from the 11 that had forewarned of full-year losses in the preceding year.

Domino Effect Starts To Propagate

In the private developers front, even established names like Country Garden Holdings Co. are feeling the heat as China’s home sales plummeted remarkably in the past month, culminating in heightened concerns of a looming default.

Country Garden’s offshore dollar bond maturing in January 2024 is currently trading at below 10 cents to the dollar, as the property development company missed an interest payment earlier this month and entered a month-long grace period.

The property crisis has now spread widely throughout China’s shadow banking sector. At the end of July, Zhongzhi Enterprise Group Co., an asset management company with over 1 trillion yuan ($137 billion), suspended payments to thousands of customers, drawing the notice of regulators and the media.

Once-China’s largest real estate company, Evergrande sought bankruptcy protection from creditors in a U.S. court on Thursday, as part of the ongoing debt restructuring.

Also Read: China’s Real Estate Crisis Echoes Lehman Moment; Country Garden Warns Of ‘Major Uncertainties’ As Bond Redemption Looms

Banks Cut Chinese Outlook

Major investment banks such as Nomura Holdings Inc., Morgan Stanley, and JPMorgan Chase & Co. have all recently revised their growth estimates downward, casting a grim picture for the outlook of the Chinese economy.

Nomura has scaled back its growth forecast for China in 2023 to 4.6%, citing disappointing data from July and an ongoing “downward spiral” within the economy. Likewise, Morgan Stanley and JPMorgan Chase & Co. have revised their predictions to 4.7% and 4.8%, respectively, illustrating the consensus on the challenges ahead.

Market Reactions: The Beginning of The End?

In response to these developments, the Shanghai Composite fell by another 1% on Friday, closing at 3,132, while the Shenzhen Component experienced a sharper drop of 1.75% to 10,459.

The downturn hit the Hong Kong’s equities market, where stocks in the Hang Seng Index plummeted by 2.05%, resulting in a weekly decline of 5.9%—marking the third consecutive drop.

The iShares MSCI Hong Kong Index Fund EWH and the iShares MSCI China ETF MCHI have both fallen by nearly 10% month to date.

The largest U.S.-listed Chinese stocks, Alibaba Group Holdings Ltd. BABA, is down 3.3% in the premarket trading on Friday, which would extend the weekly dip to 7%.

Chart: Month-to-Date Performance of China-Related ETFs and Alibaba Stock