Markets have been rattled this week by a series of news events coming out of China. On top of a series of disappointing economic figures, there have also been a resurgence in worries about the housing industry. China’s financial system is notoriously opaque, and a lot of the events have made reference to complicated financial deals, making it hard to understand what is really going on. And, what’s most important for traders: How could this affect the Forex market?
Breaking it down
The housing industry was seen as the pillar of China’s economy, but it has been in difficulties for a long time now. In fact, since late 2020, in the middle of the covid pandemic, when Chinese authorities looked to start cracking down on an industry that was poorly regulated and was showing some significant problems.
Chinese citizens were buying up real estate as a store of value, leading to so much demand that construction companies were building “ghost cities”. Millions of apartment blocks that didn’t have tenants, because they were being bought as second or third homes as a way of storing value. The Chinese government raised the requirements to finance and buy new buildings, which caused a tidal wave of effects still hurting the housing industry today.
The big collapse. Sort of.
The situation got global attention with the collapse of China Evergrande, one of the biggest property developers in China. The company faced severe cash-flow problems, and was unable to pay its debt. Fearing contagion through the rest of the industry, investors pulled out support for Chinese housing. Although the Evergrande collapse was managed, investment in Chinese home construction has been in free-fall ever since. In the meantime, Chinese economic indicators have turned increasingly gloomy.
Over the weekend, the situation got worse when it was reported that another company, Country Garden, was unable to pay some of its loans. The company is even bigger than Evergrande, and could enter default if it doesn’t manage to meet payments by September 7th.
It gets worse
Another company, Zhongrong International Trust, failed to make payments on three of its bonds. This was even more concerning because Zhongrong’s parent company is a large player in the Chinese “shadow banking” system of trusts. The company reportedly has $86.5B in assets.
While that’s relatively small compared to the entirety of the Chinese economy, JPMorgan warned that the risk of contagion could make investors even more wary about loaning money to Chinese developers. This could have ripple effects, with most debt defaults in emerging markets this year not expected to come from China.
So, what about forex?
The dollar strengthened on the news, as investors looked for safe havens. The Chinese government has been promising measures to support the economy for months. The PBOC cut interest rates in an emergency move to prop up the domestic market. But, analysts worry that if the government doesn’t do more to prop up the housing industry specifically, more developers could fail, which would be a drag on the Chinese economy.
Chinese construction uses a lot of raw materials, a good deal of which are sourced from Australia. A collapse of the industry could spell significant headwinds for commodities, including oil; and contribute to an outright global recession. Economists have warned that China might not meet its growth targets this year. As the second largest economy in the world, slowing demand from China could significantly shake up the markets, supporting the dollar at the expense of commodity currencies.
