Next China: How Much Trouble Will Property Cause? - Bloomberg

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There are more worrying issues facing the global economy today than China’s property market. But not many.

One of the starkest signs of that concern is in the bond market. Of the $139 billion of U.S. dollar-denominated bonds trading at distressed prices, almost half were issued by Chinese real estate firms.

A Big Pile of Trouble

China's property woes have led to tens of billions in bonds trading at distressed prices

Source: Data compiled by Bloomberg capturing U.S. dollar-denominated bonds with spreads of at least 10 percentage points.

Growing skepticism about the ability of Chinese developers to repay their debts has been fueled in large part by the turmoil at Evergrande, which this week missed more bond payments. An unexpected default by a smaller property firm, Fantasia, and the announcement by another that it will likely default on a bond due next week have made things worse.

The physical market for real estate is wobbling, too. Last month, contracted sales for the country’s top 100 property companies plunged by 36% from a year ago. Prices are also falling, with some local governments already setting floors on how low they can go. And with Goldman Sachs estimating that the property sector accounts for almost a quarter of China’s GDP, the potential implications for the global economy are huge.

All that doesn’t mean a Lehman moment is coming. Stresses in the property sector are the result of Beijing’s efforts to reduce debt in the economy. If the situation spirals, authorities can relax that campaign and take other measures to stabilize markets.

The question is when to intervene. As the International Monetary Fund pointed out this week, acting too quickly could undermine the credibility of Beijing’s push to curb debt. Act too slowly and it might be too late to stave off “ broader financial stresses,” the IMF noted in its semi-annual Financial Stability Report. Timing is everything.

Producer Pressures

Data released this week showed that producer prices surged in September at the fastest pace in almost 26 years. Consumer prices remained subdued.

Producer and Consumer Inflation Diverge

Soaring commodity prices in China and globally have seen costs jump for producers. While that’s yet to translate into higher prices for consumers, the growing gap between China’s Producer Price Index and its Consumer Price Index suggests that won’t last long. This week, China’s largest soy sauce maker said it will start charging 3% to 7% more for its products.

If consumer inflation picks up, it could vex policy makers already facing an economic slowdown thanks to the shaky property market, Covid concerns and the energy crunch. That’s another headache Beijing doesn’t need.

A Renewable Giant

China’s leaders aren’t afraid of bold undertakings with big costs. In the latest example of that daring, President Xi Jinping announced this week that he’s started building a huge renewable energy project, the first phase of which will have 100 gigawatts of wind and solar capacity. That’s four times more power than the Three Gorges Dam generates and more than all the wind and solar power in India.

The need is clear, as shown by the current electricity shortage that’s snarled industry. If China wants to hit its  climate goals without hamstringing the economy, it needs to build up its renewable capacity.

Once completed, the project may have 400 gigawatts of capacity, or as much as all of Europe. That’s according to Zhu Yue, an analyst at Industrial Securities who wrote about this project in early September, more than a month before Xi’s announcement. It’s hard, after all, to hide something this big.

Massive Megaproject

A reported renewable project in China would be huge on a global scale

Sources: China National Energy Administration, BloombergNEF

Note: China and world totals are as of the end of 2020

Taiwan Tensions

The past two weeks have been a noteworthy reminder of why Taiwan remains the most-dangerous flashpoint in the U.S.-China relationship. First, there were competing displays of American and Chinese military power and then days later, dueling speeches from President Xi and Taiwanese President Tsai Ing-wen.

There was plenty of saber rattling in Xi’s speech, of course, as he warned against Taiwanese independence and foreign interference. But Bonnie Glaser, director of the German Marshall Fund's Asia Program, noted that Xi didn’t place urgency on unification. With so many domestic issues, Glaser said, there’s little motivation for Xi to “ rock the boat.”

The real danger is an accident, like a collision of jets, that escalates. With so many military planes and ships in Taiwan’s vicinity, it’s no small risk.

What We’re Reading

And finally, here are a few other things that caught our attention:

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