‘Contagion’. China’s property meltdown spreads to banks sparking protests

China: Ariel views show Beijing’s Country Garden development

China’s property sector has gone into meltdown. Its second largest property developer Evergrande has debts of more than $300bn (£235bn) and is selling off assets and shares to repay suppliers and creditors.

Evergrande has now filed for bankruptcy in New York.

Now China’s largest private developer, Country Garden Real Estate Group, which is worth around $150bn, is close to collapsing with huge debts.

Trouble has been brewing in the Chinese property sector for years, as it has swelled to around a quarter of the total economy following a speculative boom.

This is triggering investor concerns about the health of the country’s shadow banking sector and the threat of a potential credit crisis, a top economic expert is warning.

The world faces a host of problems right now but they are “most acute” in China, says Jeremy Batstone-Carr, global economist and strategist at Raymond James.

“The epicentre of the economy’s travails has now shifted from Country Garden to the more shadowy Zhongzhi Enterprise Group as investors fear credit contagion might be building.”

The “secretive financial conglomerate”, as The Economist magazine describes Zhongzhi, manages about 1trillion Chinese yuan ($137billion) and recently announced plans to restructure its debt.

Zhongzhi faces a liquidity crunch after losing huge sums in the property sector and Batstone-Carr says this has triggered “an existential crisis for senior officials in Beijing”.

“Protests have broken out in various localities as dismayed customers have taken to the streets in a highly visible manifestation of disquiet.”

Last year, supreme leader Xi Jinping was forced into an embarrassing u-turn after nationwide protests against his stringent Covid lockdowns and will fear more unrest.

“Economic trouble could mean social unrest, something Beijing is no stranger to when financial scandal hits,” Batstone-Carr adds.

Last year, more than 1,000 depositors whose funds had been frozen in village banks staged a protest in Zhengzhou, the capital of Henan, but were swiftly crushed by authorities.

Today’s protests are small but could grow. “A couple dozen protesters were recently seen outside Zhongrong’s Beijing office demanding their payments, in a rare show of public discontent.”

Zhongzhi is part of China’s $3trillion shadow banking system, which operates to its own rules and is roughly the size of the entire UK economy.

Batstone-Carr says other financial institutions are also likely to have lost heavily on real estate. “Investors concerned regarding possible contagion don’t have very far to look.”

Corporate bonds issued by supposedly solid Chinese companies – known as investment-grade bonds – have suffered “accelerated price declines”, he says, in what US agency S&P Global Ratings has called a “descending staircase”.

Global investors have sold $78.3billion of China’s flagship stocks in a 12-day streak of withdrawals as concerns for the economy mount, according to Bloomberg.

Foreign investors sold 6.2billion yuan (£676m) of China’s largest spirits maker Kweichow Moutai, as well as 4.7billion yuan of both renewables stock LONGi Green Energy Technology and major lender China Merchants Bank.

A banking meltdown would cause particular disquiet in China because there is no social security safety net and depositors could be left destitute if their bank goes bust.

Chinese banks are effectively backstopped by Beijing which could step in to prevent a full-blown meltdown, Batstone-Carr adds.

“The People’s Bank of China has lowered its policy rates but the move is thought likely to deliver only modest support.”

It may have to step in with more aggressive monetary easing but with the country’s debts already heading towards 300 percent of GDP, that poses problems, too.

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