PM Conversations: Is China Too Big to Ignore?
In this Q&A article, Lazard Asset Management's Emerging Market team share their views about what may be at the heart of China's current economic turmoil.
Markets were surprised to find that a major property developer in China, Country Garden, missed a relatively small interest and principal payment on its debt. This has caused investors to become even more negative about the Chinese property sector, where demand has fallen sharply, and about the Chinese economy in general. Although the Chinese central bank has reduced interest rates, they haven't been cut as much as the market expected given deflationary trends.
Q: Is China's real estate crisis the problem — or just part of the problem?
A: At the heart of China's economic turmoil lies an escalating real estate crisis. With over 3,000 developments and a vast land bank primarily located in China's most overbuilt Tier 3 and Tier 4 cities, the company's struggles have heightened concerns of systemic contagion. Subsequently, the highly indebted China Evergrande, which has been an issue since 2021, filed for bankruptcy in the United States, further dampening investor sentiment toward the Chinese property sector and the overall economy. Again, although the People's Bank of China has reduced interest rates, the cuts have not been as extensive as anticipated considering deflationary trends.
Add to this a drop in consumer confidence. Following an initial COVID-19 reopening boom in the first quarter of 2023, China's PMI and exports have experienced a sharp decline. China had hoped to compensate for this downturn with a surge in domestic demand. Contrary to expectations, however, Chinese consumers have exhibited significant restraint in their spending habits. Recent months have seen tepid growth in retail sales while household savings have risen, indicating a growing lack of confidence in the future.
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