The ripple effect from recent turmoil in China’s real estate market was felt throughout global financial markets and forced asset allocators to consider the investment implications of a broader collapse of a critical sector of the Chinese economy. Given China’s financial ties to the rest of the world, further stress in its property sector would likely spread beyond its borders. That caught the attention of investors in Germany, one of China’s biggest trade partners.
The probability of a bubble in China’s real estate sector has been the subject of debate among investors. Over the last several decades, the Chinese government has enacted policies aimed at supporting the growth of its cities while tamping down a sharp rise in property values, including expanded credit access for developers and a reduction in residential mortgage requirements. These policies, combined with an aging population and shrinking workforce, have cast a cloud of uncertainty over the property sector.¹
Risks tied to Chinese real estate appeared to surface during the COVID-19 pandemic as China Evergrande Group, the world’s most indebted developer and at one time the largest property developer in the country, missed bond payments and struggled to shore up its balance sheet. The crisis fanned fears of contagion, as real estate investors moved to the sidelines and adjacent industries, such as heavy machinery manufacturers, began to feel downstream effects. By the end of the first quarter of 2022, real residential property prices in China had fallen to their lowest level since the onset of the COVID-19 crisis.
If a Chinese real estate bubble pops and drags the Chinese and global economies into a recession, 47% of German investors expect the impact to their portfolios would be extremely severe, and 59% say their organizations are unprepared to handle the fallout.
1. PGIM Quantitative Solutions (2022) Distress in China’s Real Estate Sector: Whose Default Is It?, March 2022. Available at: https://www.pgim.com/investments/commentary/distress-chinas-real-estate-sector-whose-default-it (Accessed 2022)
47%
OF GERMAN INVESTORS EXPECT THE IMPACT TO THEIR PORTFOLIOS WOULD BE EXTREMELY SEVERE IF CHINESE REAL ESTATE BUBBLE POPS
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