China property crisis: Financial collapse fears are overblown

With Country Garden and Zhongzhi in distress, institutional investors and economists explain why they don’t foresee a financial crisis.
China property crisis: Financial collapse fears are overblown

As Chinese property giant Country Garden teeters on default and trust provider Zhongrong fails to repay products, some investors and economists say talk of a systemic financial collapse is an overreaction.

Dominant commercial banks remain robust, while the government has tools to intervene even if direct bailouts are unlikely, they said.

“I don’t think the property debt issue poses any systemic risk to the soundness of the overall financial system,” said Chen Dong, head of Asia macroeconomic research at Pictet Wealth Management.

Chen Dong, 
Pictet Wealth Management

As of July, Chinese banking sector’s loan exposure to the property sector amounted to Rmb53.4 trillion ($7.3 trillion), which was about 23% of banks’ loan book. But over 70% was household mortgage loans, which are fairly safe, Chen said. 

China has been cutting the banking system’s exposure to property developers. Banks’ direct developer lending accounted for under 7% of loans, Chen noted.

Indirect impact from bank loans to developers’ suppliers may affect bank earnings but is unlikely to threaten entire balance sheets, he said.

Government bonds and corporate bonds comprise 18% and 9% of total social financing respectively. Current risks are concentrated in corporate bonds issued by developers and the shadow banking sector, which by definition is outside the formal banking system, Chen said.


Country Garden, one of China’s biggest developers, is at risk of default in early September after missing $22.5 million in coupons of dollar bonds this month.

Global asset owners are watching closely as the crisis unfolds, as any potential financial instability in the world’s second-largest economy may affect their China exposure, and more importantly, financial markets.

California Public Employees’ Retirement System’s (CalPERS) chief investment officer Nicole Musicco told Bloomberg this week that the pension giant is being “cautious” in its 3% China exposure of the $463 billion portfolio to avoid any major losses amid China-US geopolitical tensions. 

Several large institutions hold Country Garden’s dollar bonds, including BlackRock, Allianz, Fidelity International and HSBC, according to filings compiled by Bloomberg.

BlackRock held $358.5 million as of Aug 14 while Allianz’s position was $301 million by June 30.

Trust provider Zhongrong International Trust, owned by China’s private financial conglomerate Zhongzhi, also alarmed markets when it was unable to repay investors. Zhongzhi was a key financing source for developers as regulators downsized bank exposure. High-net-worth individuals are major clients of trust products.

The proportion of China's total financing from trust loans has declined from a 2017 peak of 4.1% to just 1% in July 2023. Zhongrong accounted for about 3% of the trust sector AUM. Asset management rules introduced in 2018 have largely severed their connections with commercial banks.

“Their size can’t shake the foundations of China’s financial system,” Chen told AsianInvestor. “The recent fears of a ‘Lehman moment’ are overblown.”

As the Chinese financial system is not entirely market-driven, the government will intervene actively through ways such as debt extension and restructuring, while ensuring unfinished project delivery.

“But that doesn’t mean the impact is not profound,” he said. “It will slowly drag down economic growth over time.”

Natixis CIB Asia Pacific chief economist Alicia Garcia Herrero concurred, believing state-owned-enterprise (SOE) developers are going to take over more unfinished projects and start debt restructuring, instead of taking over whole companies.

Alicia Garcia Herrero,
Natixis CIB

“I wouldn’t call it a bailout, although it is [indeed] a bailout,” Garcia Herrero told AsianInvestor.

Bloomberg data showed Country Garden had Rmb1.4 trillion ($192.6 billion) of total liabilities at the end of 2022, compared with Evergrande Group’s $330 billion.

Country Garden has around $557.5 million of offshore interest and principal maturities and about $1.75 billion of onshore bond maturities due by the end of this year, according to CreditSights.

“I think the market is too pessimistic. There is clearly a cyclical and structural problem in China. The real estate sector is not going to recover tomorrow, but I don't think there will be any financial crisis,” Garcia Herrero said. “China still can intervene in the market.”

However, both Chen and Garcia Herrero agreed that the future may resemble Japan’s Lost Decades during the 1990s in terms of the slowing growth.

Garcia Herrero expects China's GDP growth to fall below 2% by around 2035.


For now, some investors remain cautiously positive on growth of around 5% and Beijing’s capacity to respond through policy levers like interest rates.

“They are still posting some 5% of growth. Where else can you find that?” said a Hong Kong-based regional chief investment officer at an overseas life insurer, who spoke to AsianInvestor on condition of anonymity since it's considered a sensitive topic.

However, the CIO noted that market sentiment has turned overly negative as disappointing data becomes amplified and as positive news goes ignored. They believe Beijing retains room to ease monetary policy further given rates remain well above zero.

With existing China exposure, the CIO said their portfolios are diversified for resilience against property sector volatility.

Meanwhile, Landmark Family Office, a multifamily office that established its headquarters in Hong Kong this month, is still betting on China in the medium to long term.

Andrew Sharrock,
Landmark Family Office

“Within China, when you look at some of the fundamentals, it’s one of the cheapest markets globally,” said CIO Andrew Sharrock, adding that it is an investible market for investors who are cautious and selective.

“As we dig into it a little bit more by sectors as we hire more analysts, in the medium term, it is probably a good time to take exposure,” he told AsianInvestor.

Noting that the economy is going through a challenging transition, the family office adopts a patient and long-term view, in contrast to current market sentiment, which swings sharply on news headlines and policy announcement versus fundamentals, Sharrock said.

“At some point, all growing economies go through a debt crisis, such as the US and Europe,” he said. “It wouldn't surprise me for a few other companies to go down the Evergrande path.”

For now, however, the family office favours exposures elsewhere, such as Southeast Asia, UK and Australia, pending more resolution signals from Beijing.

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