China’s property sector has been in turmoil for over two years, with a wave of defaults on bond payments and a sharp decline in home sales. The situation has worsened in recent months, with several major developers missing bond payments and analysts raising their default rate forecasts. The property sector is a major driver of the Chinese economy, accounting for about 25% of GDP. The sector’s problems have had a ripple effect throughout the economy, leading to job losses and lower consumer spending.
The default rates on China’s property sector bonds are now at record highs. In 2022, over $63 billion of property sector bonds defaulted, and analysts are forecasting another $10 billion of defaults in 2023.
The missed bond payments pose a risk to the US economy in several ways. First, many of the bonds that have defaulted are held by US investors. If these investors are forced to sell their bonds at a loss, it could lead to a sell-off in other asset markets, including the US stock market. Second, the Chinese property sector is a major buyer of US commodities, such as steel and copper. If the sector continues to weaken, it could lead to lower demand for these commodities, which would hurt US exporters.
Third, the Chinese property sector is a major source of investment for US financial institutions. If the sector defaults on its debt, it could lead to losses for these institutions. This could make them more cautious about lending to other borrowers, which could dampen economic growth in the US and other countries. The US government is monitoring the situation in China’s property sector closely. Treasury Secretary Janet Yellen has warned that the sector’s problems could have “significant spillovers” to the global economy.
The Chinese government is also taking steps to address the problems in the property sector. However, it is unclear whether these measures will be enough to prevent a further wave of defaults.
Here are some specific risks to the US economy from the default rates in China’s property sector:
- Reduced demand for US exports: The Chinese property sector is a major buyer of US commodities, such as steel and copper. If the sector continues to weaken, it could lead to lower demand for these commodities, which would hurt US exporters.
- Losses for US financial institutions: US financial institutions have invested heavily in the Chinese property sector. If the sector defaults on its debt, it could lead to losses for these institutions. This could make them more cautious about lending to other borrowers, which could dampen economic growth in the US and other countries.
- Market volatility: The default rates in China’s property sector have raised concerns about the health of the Chinese economy and the global financial system. This has led to increased volatility in global financial markets, which could hurt the US economy.
Overall, the default rates in China’s property sector pose a significant risk to the US economy. The US government and businesses should monitor the situation closely and take steps to mitigate the potential risks. By way of comparison, our Industry is taking note and beginning to make investments in order to address the uptick in foreclosures. According to ATTOM Data Solutions, there were a total of 185,580 U.S. properties with foreclosure filings in the first half of 2023. This is up 13% from the same time period a year ago and up 185% from the same time period two years ago. And that 185% increase has at least one Prime Vendor betting on Labor.
In preparation for the winter season, Guardian Asset Management, a Prime Vendor, has agreed to actually make investments. While details are still somewhat obscure, there appears to the potential for substantial price increases hinged upon baseline training with the IAFST University as well as specific quality control guiderails. And with respect to Guardian’s dominance in the Industry such as with controlling the HUD M&M FSM for nearly six years now, their focus on Labor appears to be both guided by wisdom and an understanding of what is coming in the future.
