Exposure rates of the Dorval Asset Management Range – 22nd October 2021

Chinese real estate titan Evergrande has managed to delay official default with an eleventh-hour dollar coupon payment just the day before the deadline. However, no clear plan has been set for restructuring the group, although the Chinese authorities have successfully managed to curtail financial contagion (cf. chart 1).

 

 

This move will obviously not ward off a slowdown in the real estate sector, which is already in the offing: land sales have been tumbling for months, while moves to curb lending have not been conducive to real estate development either (cf. chart 2).

 

With the sector’s direct and indirect weighting in overall Chinese economic activity – accounting for some 25% of GDP according to some economists – this event will have a hefty impact on Chinese growth, estimated at around 1.5 points of GDP in 2022 according to Goldman Sachs’ calculations.

 

The real estate slowdown adds to the challenges raised by the energy crisis and bottlenecks, which are clearly reflected in September’s industrial output stats, marking a sharp deterioration at +3.1% yoy. However, exports are sound and consumer spending should stage a rebound on the back of management of the Delta variant, slightly offsetting the slowdown resulting from real estate and shortages (cf. chart 3).

 

 

China: clear economic slowdown

Median of economic activity indices (GS, Bloomberg, Li Keqiang) / GDP (yoy) / Consensus growth projection

 

Against this backdrop, the growth consensus for 2022 could be downgraded from the current 5.5% to 4-5% (cf. chart 4).

 

China: growth consensus

 

The extent of the Chinese slowdown is admittedly significant for the world economy, but its timing is somewhat welcome, given that the main challenge facing the economy worldwide is excess demand as compared with supply, along with the ensuing price rises. In some ways, weaker Chinese demand has a stabilizing influence for the global macro outlook – after all, with the world economy opening up again post-Covid, what levels could oil or metal prices have hit if Chinese real estate had been thriving to boot?

 

The task before the Chinese government will now be to come up with the least damaging solution possible for Evergrande. This could be combined with monetary easing at the end of 2021: the prospect of this move is already helping the Chinese stock-market stabilize, thereby underpinning our upbeat scenario for the world equity markets.

 

 

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