Chinese Developers Debt Problems Rumble On
Market Update 12th November 2021
This week there was more drama from failed Chinese
property developer Evergrande, which avoided default at
the very last moment. The firm owes in excess of $300bn,
with a significant portion owed to funds and investors
around the globe. While the solvency of one single company
shouldn’t really be headline news, it is merely the canary
in the coal mine for a growing problem in China’s property
market; with a small chance that this could be the start
of a major collapse in a similar vein to the global
financial crisis. As many of the banks exposed to Chinese
property loans are state-owned banks it is hoped the fall
out won’t be as severe.
Elsewhere inflation
remains a hot topic as US inflation topped 6% for the
first time in 30 years. This has prompted criticism of the
US Federal Reserve for letting price rises get out of
control, but the data is still dominated by things that
could be explained by the pandemic. Used cars, for
example, are expensive as rental companies are buying back
cars they sold during the pandemic. In the UK and Europe
inflation is less advanced.
UK: GDP GROWTH SLOWS AMID IMPROVING RETAIL SALES
UK GDP growth increased in the third quarter of 2021 but
at a slower speed than forecast. UK output grew 1.3% in
the three months to September, down from the previous 1.5%
forecast by the Bank of England following downward
revisions to July and August. Growth was also sharply down
from 5.5% in the second quarter, as the boost from
businesses reopening eased and shortages of goods and
workers hindered economic activity. However, GDP growth
accelerated towards the end of the quarter, increasing by
0.6% in September, up from 0.2% in August.
Figures
in September point towards stronger growth in the fourth
quarter. Retail sales figures released in October show
sales increased 1.3% and are 6.3% above retail spending in
October 2019. This rise is likely to persist into the next
quarter as the countdown to Christmas approaches. Stronger
retail spending also contributed to positive trading
updates from the likes of M&S and Halfords, helping
the drive UK equity values up.
US: INFLATION PUTS BIDEN UNDER PRESSURE
US inflation came in higher than markets were expecting,
causing a wave of volatility. The Consumer Price Index hit
6.2% for the year to October, up from 5.4% in September,
driven partly by rising energy costs. This caused
President Biden to declare that curbing energy inflation
is now a top priority as Republicans use rising prices to
criticise his management of the Covid recovery. Without
energy and food costs, core inflation has remained high
but stable. At 4.6%, it is 0.1% higher than in June.
The
sharp rise in the headline rate has renewed speculation
about US interest rate policy. US Treasury yields have
risen as investors move out of government bonds. Equities,
particularly high-growth tech stocks, also fell, while the
US dollar rallied sharply. Higher inflation also means
Biden faces the choice of reappointing Jerome Powell as
chair of the Federal Reserve or opt for a candidate with a
more aggressive approach to raising interest rates to
deflect criticism in advance of mid-term Congressional
elections next year.
GLOBAL: EVERGRANDE DEBT CONCERNS CONTINUE
Troubled Chinese property developer Evergrande narrowly
avoided default again this week. However, widening
concerns about the ability of Chinese companies to service
their debt has pushed average yields to levels not seen
since the financial crisis as investors sell up. With
yields on Chinese dollar-denominated high yield bonds
around 28%, many companies will face real difficulty
refinancing their existing borrowing.
Investor
nervousness has caused Chinese investment grade bonds to
come under pressure as well. The spread on Chinese
investment grade bonds, the additional yield that
investors demand for holding risker assets, increased by 8
percentage points this week. However, there are signs that
the Chinese government may be about to try and defuse the
problem. Chinese state media has reported that a series of
rule changes are on the way which should make it easier
for developers to access finance. Shares in property
developers, including Evergrande, recovered slightly at
the end of the week.
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Yours sincerely,
Phil Simmonds LL.B(Hons), MBA, FPFS, Chartered MCSI
Chief Executive Officer | Solicitor (non-practising)
Chartered Wealth Manager | Chartered
Financial Planner
E:
phil.simmonds@private-office..co.uk