- In August Country Garden defaulted on payments of its debt and, on 17 August, Evergrande sought bankruptcy protection in the US.
- China’s economy was losing momentum and property carries great weight in it: industry, jobs and household savings.
- A weaker China means less demand for European industry, but also less pressure on commodities.
In August 2023 the developer Country Garden defaulted on payments of its debt and, on 17 August, Evergrande sought bankruptcy protection in the United States. China’s economy was losing momentum, and the difficulties of the large developers revived doubts about a sector that had been one of its engines.
Although China’s property crisis had been developing for some time, these episodes brought it back to the foreground. What happens in the world’s second-largest economy is not a distant matter: it affects world trade, commodity prices and investor confidence, and therefore reaches European companies through several channels. For an economy as large as China’s, the difficulties of one sector are not limited to the companies directly affected: they can spread to the banks that lent to them, the suppliers that sold to them and the local governments that depend on land sales.
Two large developers in difficulty
What worried most was that two large Chinese developers were in serious trouble at the same time: an isolated default can be blamed on one company, but two simultaneous cases point to a problem in the sector.
A developer is financed largely by debt and by buyers’ advance payments. When sales slow and financing becomes dearer, the model comes under strain quickly, and defaults follow. The process also affects suppliers, contractors and families who have paid for homes they have not yet received. Debt restructuring processes of large groups tend to be long and complex, with multiple creditors and jurisdictions, and their outcome affects not only direct investors but also the general climate of confidence.
An economy losing momentum
China’s economy was losing momentum, and property carries great weight in it: construction drives industry, jobs and household savings. When this sector suffers, the effect spreads to consumer confidence, consumption and investment.
In China, moreover, housing is one of the main forms of household saving, so a fall in its value or in activity in the sector translates into a lower willingness to spend. That circle, linking property to consumption, explains why the problems of a few companies can condition the growth of an entire country. A slower pace of Chinese growth influences world trade and demand for capital goods, components and consumer products, so European exporters in certain sectors are sensitive to this evolution.
What it means for Europe
A weaker China means less demand for European industry, but also less pressure on commodities. The effects of the world’s second-largest economy always arrive. Companies that export to China or that depend on it as customer or supplier can review their exposure, diversify markets and watch collection periods.
For those who buy commodities, lower Chinese appetite may ease some prices. It is an example of how one and the same event can be a problem for some and a breather for others, depending on one’s place in the chain. It is worth identifying where each business stands and how much room it has to adapt to either scenario. For investors, indirect exposure to China through funds or multinational companies also deserves review, because it is sometimes larger than it first appears and is worth knowing.
The swings of a large economy are not distant: they arrive through trade, through prices or both.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
