The crisis in the Chinese real estate sector warrants close attention but seems unlikely – as things stand at this point in time – to create a systemic challenge for investors.
We expect elevated volatility within directly- and indirectly-linked areas but knock-on consequences to the wider China economy to be limited.
In our view, the government may want to set an example, but it’s likely to ensure there’s no widespread contagion across the property sector, not least given the large percentage of China’s household wealth tied into the sector.
The agenda of the Chinese authorities in recent years has been to deleverage the financial system, encourage a less debt-dependent growth model, and reduce moral-hazard risks. The timing of the current real estate crisis might be a consequence, in part at least, of this agenda.
Our base case remains that authorities have the capacity to underwrite the situation and instil confidence and will do so if required. However, they may also like to see over-aggressive developers and lenders suffer some pain, in keeping with their longer-term ambitions around rebalancing the economy.
Newton Global Emerging Markets team
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