China’s torch to real estate bubble melts bond-holder wealth
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What happens when you entrust an increasingly authoritarian politician – a person who plays missile target shooting with fake American aircraft carriers and is ready to become a leader for life – a real estate bubble?
In Xi Jinping’s case, he shatters it. The authoritarian Chinese president’s real estate crackdown sparked the biggest sell-off in the country’s international junk bond market in history, and in just six months bondholders lost a third of the wealth of their investments.
Since the start of the summer, real estate giant China Evergrande Group has been on the verge of failure like a circus clown on an electric wire and four other developers have defaulted since September. This is because Chinese regulators have clamped down on the debt and credit markets. The crackdown has laid a wrench in the growth of home sales. This has squeezed real estate developers, and these developers are responsible for almost all of China’s high yield issues. The last to fall in this game of economic dominoes are the bondholders:
- According to a Bank of America index, bonds in China’s International Junk Bond Index are currently valued by markets at $ 39 billion below their face value of $ 112 billion.
- Six months ago, the market and bond face values were at the same level. Investors have been throwing them away ever since, with no end to the pain in sight.
Xi has started! Its real estate repression can be swift and painful, but it is not without merit. China’s real estate activity accounts for 24% of the country’s GDP – compared to 15% in the United States – and risky speculative behavior has driven up prices, built unoccupied apartments and created massive and heavily indebted companies like Evergrande.
Growth charter: The government’s move could halve the country’s annual growth to about 3% or less each year until 2031, according to the Institute of International Finance. This is dangerous because, according to former Chinese vice-finance minister Zhu Guangyao, the country must maintain 5% growth until 2025 to avoid the so-called “middle-income trap”, which occurs when the growth of a developing economy stalls in front of its citizens. “Incomes are catching up with those in the developed world.
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