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3 Reasons to be Weary of a Chinese Real Estate Crash

3 Reasons to be Weary of a Chinese Real Estate Crash

I conduct market analysis and provide insights on economics, investing, bitcoin, real estate, and personal finance. Here is a brief inside some of the comings and goings of the real estate sector in China.

China: Economic Growth

Source: Bloomberg Terminal. *2020s is an estimate*.

China had the fastest growing large world economy for decades.

According to an article from Bloomberg, China’s nominal GDP surpassed that of Italy in 2000, France in 2005, the United Kingdom in 2006, Germany in 2007, Japan in 2010 and that of the Eurozone in 2018 making China the world’s third largest economy after the EU and U.S.

China’s economy is massive — over $18 trillion in nominal GDP.

And it’s not isolated either — China’s top two trade partners are the U.S. and the EU, the other members of the top 3 world economies.

China: Three Reasons To be Weary

Times are changing for the world’s second largest economy.

First of all, China’s economic slowdown is inevitable. The above graph charts estimated 2020 GDP based on estimates provided from a Bloomberg Terminal by an unknown Wikipedia author. After three decades of around 10% GDP growth, the Asian giant is coming back down to Earth, with 5% annual growth expected.

In comparison, other estimates place India’s economic growth around 7% annually, surpassing china.

The second issue with China’s economy was and is lockdowns due to COVID-19 started at the onset and have continued into 2022. This has affected supply chains across the world and continues to do so.

The third and biggest reason for concern is that there is trouble in the Chinese real estate market, which is massive. Some estimates, like this one from Al Jazeera, place property and real estate as roughly one-third of this massive economy.

Massive Real Estate Junk Bond Defaults

Two of the largest Chinese real estate developers, China Evergrande Group (Ticker: EGRNF) and Kaisa Group Holdings Ltd. (Ticker: 1638) starting defaulting on their debts as of December 2021.

These large companies issue junk bonds.

A bond is a debt or promise to pay investors interest payments along with the return of invested principal in exchange for buying the bond.

Junk bonds represent bonds issued by companies that are financially struggling and have a high risk of defaulting on their repayments, when compared to other corporate and government bonds.

Evergrande had over $300 billion, yes B-I-L-L-I-O-N, when is started defaulting on its payments in September 2021.

In December 2021, Kaisa defaulted on a $300 million bond payment. At the time, they had a total of $10.9 billion in outstanding debt.

These events set off a chain reaction that has negatively affected the Chinese real estate market.

First off all, investors have been lending a lot less to Chinese real estate developers.

Home sales in China are down 38%, and other adjacent industries are feeling the pain as well.

Twitter Polling

As investors generally follow other investors, I thought I would ask some if they considered this to be a problem.

These Twits (as Elon Musk calls us) answered that yes, they are concerned. A strong majority — almost 71%, or 96 of the respondents did think this would affect the US economy.

While there is no guarantee that this will cost another crash — due to how connected world economies are, this is a factor that is too large to be ignored by investors in today’s financial markets.

Polling Source

I conduct Twitter polls using my personal account and TheLatestBlock.com’s Twitter accounts.

Around 37% of my followers are from the U.S., while around 1/4 are from the Asia/Pacific region.

If you enjoy reading stories like these from thelatestblock.com, consider subscribing.

 


This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.

Author

Alexandre Lores is a personal finance writer from Tampa Bay, Florida, with the goal to help one million people achieve financial freedom. He has spent over five years studying markets and economics, finding Bitcoin in 2017 and never turning back. He frequently appears on TV and in online news articles and is a regular Twitter spaces host.

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