The recent property stress in China has reignited concerns regarding the potential spillover of the sector’s prolonged decline into the equity market. The recent fluctuations were prompted by news that Vanke, previously regarded as a quasi-state-backed indicator, is attempting to postpone an onshore bond repayment. The largest shareholder is a Shenzhen-linked state-owned enterprise, and for years, the company has been perceived as functioning with implicit backing from the state. The authorities’ choice to refrain from intervention and guide the firm towards a “market-oriented” restructuring has caused turbulence in credit markets and generated uncertainty regarding the extent of support that may be offered to other developers. Thus far, Chinese equities have responded to the news with composure. The broader market has not experienced a significant sell-off, and certain property-linked indices remain in positive territory for the week, despite China’s underperformance relative to the tech-driven recoveries observed in Korea, Taiwan, and Japan. The relative underperformance could be attributed to the fact that Chinese stocks experienced a smaller decline during the prior downturn.

It is posits that the turmoil in the property sector introduces three channels of risk to equities, yet only one possesses significant implications for the broader market. The initial impact will be felt directly by publicly listed developers if access to credit diminishes. However, the significance of property within major benchmarks such as the Hang Seng has decreased to levels not seen in decades, thereby constraining the potential negative impact even if the sector experiences further decline. The second aspect is the ripple effect on financial institutions, which possess developer bonds and are exposed through wider lending activities. Banks have reportedly declined to extend credit to Vanke, indicating a shift towards a more stringent risk tolerance. Financials have become significantly more crucial to the performance of indices than property itself.

Despite this, with the PBOC anticipated to lower bank funding costs, analysts do not perceive the threat escalating to a systemic crisis level, although pressures on profitability may increase. Third-party advertisement. This does not constitute an offer or recommendation by Investing.com. Refer to the disclosure here or eliminate advertisements. The third, and most significant, channel is the overarching impact on China’s economy. Construction has consistently acted as a drag on growth, and the continuing decline in the property market will further exacerbate this issue.

However, publicly traded companies, particularly those in the technology sector, have demonstrated strong earnings performance in the face of a macroeconomic slowdown. The observed resilience, alongside policy measures aimed at stabilizing credit conditions, indicates that equities could persist in their upward trajectory until economic fundamentals inevitably exert their influence.