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China’s real estate sector has become the biggest threat to global economic stability, a closely watched investor survey showed, driving a “dramatic” shift in emerging market stocks toward the United States.
In Bank of America’s monthly poll in September, one-third of fund managers cited Chinese commercial real estate as the most likely source of “systemic credit events,” a share that has more than doubled since last month. Beyond concerns about U.S. commercial real estate.
The highly indebted industry that drives about a quarter of China’s economic activity has struggled since developer Evergrande Group defaulted on dollar-denominated debt at the end of 2021.
Troubles for Chinese stocks have deepened in recent weeks after developer Country Garden failed to repay its overseas debt, fueling concerns about a broader economic slowdown and weighing on the broader Chinese stock market. Foreign investors in August Capital outflows hit a record high.
The company avoided a technical default last week by making a payment within the grace period.
The yuan fell to a 16-year low against the U.S. dollar last week, falling below its lowest point a year ago when much of China was locked down under President Xi Jinping’s zero-COVID policy. China’s growth expectations are also back to their “lockdown lows”, with investors expecting the economy to strengthen over the next 12 months to have a net worth of zero.
A Bank of America survey of 258 fund managers with $678 billion in assets under management showed investors are bracing for further pain in China’s stock market, which has lagged far behind European and U.S. stocks this year.
More than a fifth of managers surveyed said they believed shorting Chinese stocks was the “most crowded” trade in financial markets. Only bets on gains in big tech stocks are considered more popular trades. In turn, investors returned to buying U.S. stocks, with allocation ratios rising from a net underweight of 22% in August to a net overweight of 7% in September. Allocations to emerging market stocks fell sharply, in what Bank of America called “a dramatic shift in relative risk exposure.”
Policymakers in Beijing last month tried to counter the weakness in the real estate sector with a series of stimulus measures, including increasing personal income tax subsidies and lowering minimum mortgage down payments.
But these actions have not yet reached the “bazooka” level that many investors believe is needed. According to the Bank of America survey, only 12% of allocators expect to finance large-scale fiscal stimulus through the issuance of government bonds. More than half of investors expected Beijing to provide further targeted support for the real estate sector, while 15% said they did not expect any meaningful stimulus measures.
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