(October 18): For months before the 2008 financial crisis, the banking heavyweights of Federal Reserve Chairman Ben Bernanke said the subprime mortgage turmoil would be “contained.”
This phrase is now making a comeback in Beijing, as regulators try to reassure markets that the world’s second-largest economy can weather the China Evergrande group crisis. Investors hope Chinese policymakers will be more adept at containing the damage than their Wall Street counterparts.
People’s Bank of China Governor Yi Gang told a Group of 30 virtual meeting on Sunday that authorities “may contain the risk of Evergrande”, even as the ailing developer “expresses a bit of worry “. Another PBOC official called the situation “controllable” during a press briefing on Friday, echoing statements by several of the country’s biggest lenders in recent weeks.
So far, financial markets are showing little sign that Evergrande’s problems will escalate into a 2008-like crisis. Credit strains haven’t spread much further than Chinese developers, while a stable yuan suggests that capital outflows are not a problem. Central bankers in South Korea, Malaysia and Europe are optimistic about risks, while much of Wall Street has rejected comparisons with Lehman Brothers Holdings Inc. China’s sovereign credit default swaps have collapsed last week.
A refrain among optimists: The Chinese government has helped create stress in Evergrande by tightening restrictions on the real estate sector, and can therefore limit the pain if necessary. Regulators last month asked some banks to speed up mortgage approvals in the fourth quarter, people familiar with the matter say, a sign that policymakers may take a more flexible stance in some areas.
âI don’t think China is frankly that stupid,â said Bill Winters, CEO of Standard Chartered Plc. Bloomberg Television last week, when asked if Evergrande would cause a global crisis.
Yet the signs of an overflow in the economy are hard to ignore. Data on Monday showed Chinese home sales by value fell about 17% in September from a year earlier, as economic growth slowed more than expected. The country’s $ 12 trillion onshore bond market has also started to crack.
âReal estate makes up a third of the Chinese economy and it’s the big elephant in the room,â said Mark Matthews, Asia research manager at Bank Julius Baer & Co. Bloomberg Television Monday. “The problem with this kind of elephant in the room is that there could be a crisis, but the timing is impossible to predict.”
Here is a sample of measurements to show if Evergrande’s spell is contained:
The stress is evident in China’s real estate sector, which accounts for nearly half of the troubled global dollar-denominated debt. Yields in China’s junk dollar bond market – dominated by real estate developers – recently exceeded 20% to reach their highest level in a decade. Chinese high-yielding credit spreads against comparable T-bills are near the widest on record, at around 2,055 basis points on an option-adjusted basis. Investment grade bonds appear to be “oversold,” according to Citigroup Inc.
The turmoil also led to a drop in bond sales. Chinese borrowers valued just $ 1.7 billion in offshore dollar notes in October, the lowest price since 2015. Sales in Asia fell to $ 3.5 billion, on track for the month the slowest of this year.
The high dollar-yuan swaps suggest that some Chinese banks may accumulate yuan to hedge against a liquidity crunch. But the People’s Bank of China drains funds from the financial system almost daily in October, a sign that lenders have enough liquidity. Short-term borrowing costs remain low at around 2.1% in the repo market – which, like the United States, is the main source of funds for the securitized banking system. In other words, the Chinese interbank lending market is doing well.
Money is flowing
The Chinese currency withstood the Evergrande crisis. The yuan has strengthened nearly 0.5% against the dollar last month. There is little evidence of central bank intervention as the country’s foreign exchange reserves remain largely stable.
The national stock market is also showing signs of calming down. While the CSI 300 is down 16% from its February peak, much of the drop was caused by official efforts earlier in the year to reduce the foam induced by pandemic stimuli. In the past four weeks, the gauge has changed little. An indicator of Chinese real estate companies is trading near its lowest level in three years.
The slowdown in the real estate market is having an impact on the economy, as the real estate sector accounts for almost 30% of gross domestic production and 40% of household assets. The economy grew 4.9% in the third quarter, up from 7.9% in the previous quarter, official data showed on Monday. An energy crisis has also weighed on growth.
Beijing’s real estate crackdown has slowed construction activity and restricted funding for the sector. The combined contract sales of the nation’s top 100 real estate companies fell 36% in September from a year earlier.
The indexes of speculative-grade debt in the emerging world and the United States are relatively calm, with yields around 7.2% and 6.5% respectively. MSCI Inc’s global equity benchmark is just 2.2% off an all-time high. The third quarter earnings season showed that business was booming among Wall Street investment banks. The VIX – often referred to as the âfear gaugeâ – is about 18% below its average for the year.