China's growth has been built on apartment sales Approx 29% of China's gdp is reliant on domestic property and construction sales, with housing construction falling 13.6% in August. There are approx 90 million apartments owned but unoccupied in China - investors happy to have it sit empty for past capital gains. In December 2020 there were 70m apartments under construction. So there is a mass of oversupply.
Apartment prices were in bubble territory The median Beijing/Shenzhen apartment costs 40x more than the median family disposable income. In Sydney it is 7 times.
Apartment prices and sales are now in free fall China’s largest 100 developers saw sales fall 36% in September. The 10 largest, including Evergrande, Country Garden and Vanke, saw sales crash 44% vs Sep. 2020. If an apartment sells for say 20% less than last month, then this is the new benchmark for all apartments in the building. This will be the greatest destroyer of household wealth in moder times in China. Developers are defaulting Modern Land Co. Ltd asked investors to push back the maturity rate on its $250mn bond this morning. Evergrande is a basket case. Fantasia missed a debt repayment - default. 24 of the 59 Chinese property developers in an ICE BofA index of Asian corporate dollar bonds had yields of over20% on Friday. This level indicates a high risk of default.
Financial implications for China Local government revenue earned through land sales fell 17.5% in August. China's past outstanding GDP growth is likely to be significantly less, could it go negative (remember 29% of gdp is the property sector) Will there be contagions? Will China prop up the developers who are bankrupt? Demand for Iron Ore is likely to fall. This is likely to have far reaching implications, but what they are, who knows.
