China, to put it simply, is a wild card in 2024. The troubles of Zhongzhi Enterprise Group highlight the ongoing crisis in the Chinese economy. With Zhongzhi filing for bankruptcy due to liquidity issues and an inability to repay debts, echoes of the Evergrande and Country Garden crises resurface, indicating a systemic problem within China’s real estate sector.
Real estate has traditionally been a cornerstone of the Chinese economy, contributing to roughly one-third of its GDP.
However, the sector has been experiencing a decline, characterized by a reduction in commercial projects, an increasing number of vacant properties, and a continuous drop in sales. This downturn has significant repercussions, as the real estate industry is not only a substantial economic driver, but also a major consumer of resources and a large employer. The slump is not just a domestic issue; its effects resonate through global markets, with China’s stocks nearly 60% below their post-Covid-19 peak.
The underperformance of Chinese equities has been a drag on major emerging markets indices, which have struggled to make headway.
Why China’s Economy Matters Now
All eyes are now on the Chinese government’s next move. There is an expectation that the government will implement a range of stimulus measures to stabilize the economy and spur growth. The People’s Bank of China (PBoC) has already taken some steps, albeit modest ones. For example, the PBoC has slightly reduced its key loan prime rate, its medium-term lending facility rate, and its 5-year mortgage reference rate. Earlier this month, the PBoC infused $50 billion into banks, a move aimed at boosting lending and potentially signaling the start of a more comprehensive stimulus plan.
Despite these interventions, the impact on economic activity has been minimal. There is a belief that more aggressive and expansive policies might be on the horizon as the markets anticipate further stimulus measures. This anticipation is evident in the bond market, with Chinese 10-year government bond yields dropping to 2.54%, a level not seen since the depths of the Covid-19 pandemic.
The Bottom Line
The significance of China’s economic condition extends beyond its borders. As the second-largest economy in the world, any significant downturn in China has the potential to trigger a global recession. The country’s economic health is closely watched by investors, policymakers, and businesses around the world, with the real estate sector being a particular area of concern due to its size and interconnectedness.
The Chinese economy is at a critical juncture. The collapse of Zhongzhi Enterprise Group serves as a stark reminder of the underlying fragility within the real estate sector and the broader economy. While the PBoC has taken steps to address the liquidity crunch and downturn in economic activity, the modest nature of these actions suggests that the bottom may not have been reached yet. I believe we are getting close, but what happens next with China likely will drive what happens next for the world.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
