China property: accelerating meltdown threatens other markets

Receive free Lex updates

We’ll send you a myFT Daily Digest email rounding up the latest Lex news every morning.

The floorboards are giving way underneath the Chinese property companies. On Monday, share prices throughout the sector fell by the most this year. Evergrande dropped 21 per cent after it scrapped key creditor meetings at the last minute.

There is still risk of contagion both within China and beyond. That nervousness could spread into commodities. Iron ore prices fell more than 4 per cent on Monday. This comes when seasonal demand from China has historically been strong. China buys about 70 per cent of the world’s seaborne iron ore. Chinese developers have stopped restocking steel.

Price volatility tells the story. Already the market fears a default by Country Garden. A dollar bond of Country Garden, previously one of the safest large developers, fell below 10 cents on the dollar. China Aoyuan Group’s stock price fell 73 per cent. A court-ordered liquidation of China Oceanwide looms after a Bermuda court issued a winding-up order.

Any hand-wringing on property has had most of its effect on the shares and bonds of developers. But there are links to other sectors as well, most clearly banks. China Oceanwide is a shareholder in China Minsheng Bank, the largest privately owned lender in China. Minsheng Banking Corp has already filed a lawsuit against Oceanwide Holdings for failing to repay its debts.

Most European stock market indices fell on the day. Chinese junk dollar bonds, including those unrelated to property, have sustained significant drops, reflecting growing nervousness among investors over contagion. Previous hopes of a massive stimulus plan by Beijing have disappointed as rollouts have remained incremental this year.

Beijing has repeatedly said no direct bailout is coming. Meanwhile, property prices have continued to drop as aggressive policy easing has done little to revive sales and projects have stalled. In the first half of August, Chinese home sales in 50 major cities fell 29.3 per cent on the year, according to S&P Global Commodity Insights.

For all Beijing’s reticence to jump in, China’s accelerating housing implosion can be contained. Local, state-owned banks should quickly absorb any smaller, bankrupt banks. But as the other markets’ reaction to bad news reveals, any shocks will keep reverberating through markets for global commodities and Asian high-yield bonds.