According to an investor survey closely followed, the Chinese property sector is the greatest threat to global stability. This has fueled a “dramatic” shift away from emerging markets and towards the US.
In the Bank of America monthly survey, a third of fund managers cited Chinese commercial real estate in their poll as the source of the most likely “systemic credit events”. This proportion has more than doubled since last month and now surpasses concerns about US commercial properties.
Since developer Evergrande defaulted in its dollar-denominated loans in late 2021, the highly indebted industry, which accounts for about a quarter of China’s economic activities has been in a lurch.
In recent weeks, its woes have intensified as developer Country Garden has missed payments on overseas debt. This has exacerbated concerns about an economic slowdown, and lowered the Chinese Stock Market which saw a record outflow of foreign investors in August.
The company avoided technical default by paying within the grace period last week.
Last week, China’s renminbi fell to a 16 year low against the US Dollar. It also dropped past the nadir that it reached a year earlier when President Xi Jinping was enforcing his zero-Covid policies in a large part of the country. Chinese growth expectations are also back to “lockdown” lows, with investors expecting the economy will not grow over the next year.
According to the BofA survey, 258 money managers have $678bn of assets under their management. This suggests that investors expect further losses for China’s stock markets. The Chinese market has been far behind European and US counterparts in this year.
Over a fifth (just over) of the managers surveyed thought that shorting Chinese stocks was “the most crowded” financial market trade. The only trade that was seen as more popular were bets placed on the rise of large technology stocks. Investors re-entered the US stock market, increasing allocations from 22 percent net underweight to 7 percent overweight. BofA described a “dramatic change in relative exposure” as the sharp decline in allocations to emerging markets equities.
Last month, Beijing’s policymakers took a flurry of measures to stimulate the property market. These included an increase in personal tax allowances as well as a reduction in mortgage downpayments.
The actions taken have not been as ” bajooka ” as many investors believe is needed. According to the BofA study, only 12 percent of allocators expect a large fiscal stimulus funded through the issuance government bonds. Only a little over half of investors expect Beijing to continue its targeted support for real estate, while 15% believe that there will be no meaningful stimulus.