Is China's cloudy real estate outlook a silver lining for inflation?

Economy

Published: 18 Aug. 2023, 18:19

Is China's cloudy real estate outlook a silver lining for inflation?

Chinese flags hang in front of the Evergrande Center in Shanghai, China, on Sept. 24, 2021. [REUTERS/YONHAP]

Economic risks spurred by China’s decaying real estate market could bring forward an end to monetary tightening policies worldwide, experts say.

Chinese property developer Evergrande Group filed for bankruptcy protection in the United States, multiple foreign media outlets reported Thursday.

The petition came amid Evergrande's struggle to settle more than $300 billion of liabilities some two years after it defaulted on its debt.

Country Garden Holdings, another major Chinese developer, is nearing default too as it failed to meet the Aug. 6 deadline for two bond coupons totaling $22.5 million. County Garden’s liabilities totaled around $194 billion at the end of last year.

Downfall in the real estate sector of the world’s second-largest economy looms despite the Chinese government’s efforts to contain the fallouts of Evergrande’s default, including the reduction of short-term rates and liquidity provision.

A logo of China's Country Garden Holdings is installed on a residential apartment building developed by the company in Jiangsu, China, on Oct. 31, 2021. [AFP/YONHAP]

Market observers widely maintain conservative views on the Xi Jinping government taking large leaps to support the sector, other than preventing the property market from inflicting damage on the country’s broader economy.

Default risks were predetermined to some extent with Chinese President Xi’s catchphrase “housing is for living in, nor for speculation” which translated into financial guidelines dubbed “three red lines” in August 2020 to crack down on excessive borrowing.

The three red lines policy put caps on the debt-to-asset, debt-to-equity and debt-to-cash ratio on property developers.

With the seized-up real estate sector weighing down the Chinese economy, some see China’s deflation as a silver lining that may cool inflation globally.

“Persistent deflation in China would likely spill over to developed markets, as a weaker yuan and an elevated inventory-to-sales ratio lowers the cost of Chinese goods abroad — a development central bankers in developed markets would likely welcome,” Pimco economist Tiffany Wilding said Wednesday.

The construction of buildings developed by Evergrande Group have ground to a halt in Hainan, China, on Jan. 6, 2022. [REUTERS/YONHAP]

“The Chinese real estate issue may wrap up the recent global rate hikes,” IBK Securities analyst Byun Joon-ho said.

Fed Chair Jerome Powell’s neutral stance at the Jackson Hole symposium next week could reignite anticipations for an end in the rate hike cycle, Byun added.

Some argue China's jitters need not be over-interpreted.

“Woes on a serial bankruptcy have spread during the Evergrande default crisis, but it never happened,” said Jeon Byung-seo, head of the China Economic and Financial Research Institute.

“Country Garden’s issues occurred from a short-term liquidity crunch, not from poor management or investment, and will likely be solved by the government easing regulations on borrowing to fund support.”

For Korea, finding a hedge against China’s economic risks is a takeaway from yet another China-originated concern. Korea’s exports tumbled when the Chinese real estate sector slowed down in the back half of 2015.

“China’s economic crisis can be a threat and a catalyst for innovation at the same time for Korea, which is why the country must persist in ‘de-risking’ from China, notwithstanding losses in the short run,” said Shim Sang-ryul, professor of international trade at Kwangwoon University.