- The Evergrande crisis is weighing on Chinese property investment and dragging the economy down, UBS and Barclays said.
- Both banks slashed their 2021 Chinese GDP forecasts, saying the energy crunch would also knock growth.
- China’s economy is unusually reliant on property investment for growth, making Evergrande a big worry.
The ongoing crisis at the property developer Evergrande is infecting the broader Chinese economy, according to UBS and Barclays, who warned that growth will be much lower than previously expected in 2021.
The two banks said Evergrande’s looming default was squeezing the broader Chinese property sector – which is one of the main sources of growth in the economy. They also said China’s power crunch would act as a drag.
“Both onshore and offshore bond markets remain effectively closed for [property] developers while sales, the main source of cash flow, are dropping,” UBS analysts, led by chief China economist Tao Wang, said in a note on Monday.
Analysts at Barclays, including chief China economist Jian Chang, said there has been a “rapid deterioration of housing market sentiment as Evergrande financial difficulties [have] spread to more developers in October.”
UBS slashed its 2021 growth forecast for China’s gross domestic product to 7.6% from a previous estimate of 8.2%. Barclays cut its forecast to 8%, having predicted growth of 8.5% earlier in the year.
China’s economy slowed sharply in the third quarter, data showed on Monday. It grew 4.9% year on year, down from 7.9% in the second quarter.
Both banks said Evergrande was one of two big problems facing the Chinese economy, the other being soaring global energy prices and the resulting production shutdowns in the country.
Although China has responded to the energy crisis by ramping up coal production, the measures will take time to bear fruit, UBS said. “Production restriction and power shortage will likely continue to weigh on Q4 growth,” the bank’s analysts wrote.
China’s central bank said on Friday any possible spillover from the crisis at Evergrande would be controllable as it sought to reassure investors and homeowners that the broader property market is safe.
Yet Barclays said on Monday: “September data point to a faster-than-expected deterioration in leading indicators for real estate investment, including home sales, land sales, and housing prices.” That’s worrying for the Chinese economy as it’s much more reliant than other countries on property investment for its growth, with the real estate sector making up about 29% of GDP.
Evergrande has so far missed a number of bond payments and could default imminently. Other property developers such as Fantasia have also begun to show signs of stress.
UBS said: “We expect property new starts to decline by 20% year-on-year in Q4 2021 and property investment decline by 5% or more, bringing further downward pressure on the economy.”