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Investors now believe China's real estate crisis is the biggest credit risk to the global economy, according to a Bank of America survey. According to the BoA survey, 33% of respondents in September were concerned about China's real estate sector, double the percentage in August.
Scenario testing of China's real estate collapse suggests a contraction in the Chinese economy and the risk of a deeper recession than expected in the United States. But credit analysis tools suggest that Chinese policymakers would rather eliminate that possibility than risk an economic hard landing.
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China's real estate crisis could cause a real estate crash and push the country's economy into contraction. Bloomberg Economics' baseline year-over-year forecasts would need to be lowered by 4.84 percentage points for the third quarter, and 6.46 percentage points, 7.89 percentage points and 4.2 percentage points for subsequent quarters.
“We see China's economy closer to a crisis moment than at any time in the past decade,” said Zhang Xu, chief Asia economist at Bloomberg Economics. “You might say this sector is too big to fail, but from a solutions perspective, it’s too big to save.”
A hard landing in China would also impact the US economy. Bloomberg Economics' quarterly baseline forecast for U.S. GDP needs to be revised down by about 0.4 percentage points for the third quarter and about 0.6 percentage points for the fourth quarter.
Tom Orlich, chief economist at Bloomberg Economics, said such a scenario would “turn the expected shallow recession in the U.S. into a fairly deep recession.” “That's not our base case. We think China will hobble through the hit to growth, but it won't be a hard landing. But we think we're wrong. What would happen if we did?”
Meanwhile, Chinese real estate stocks suffered their steepest decline in nine months in late September on concerns about the possible liquidation of China Evergrande Group and other developments. China's Akuyuan Group's stock price fell the most, dropping 72%.
It is also worth paying attention to the actions of the Chinese government. China's state-owned banks are extending debt maturities rather than taking write-downs when dealing with defaults. Government support for home buyers stabilized the decline in new home sales in September. “The effects of the policy have only started to appear in some core cities,” said Liu Shui, an analyst at China Index Holdings. “The positive effects are still accumulating.”
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Perform scenario testing using Bloomberg's enhanced BECO and SHOK tools. Run BECO MODELS to explore pre-built scenarios.
To see the default risk of a large developer in China:
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