As the China Evergrande story continues to unfold, one begins to wonder if the contagion extends past Evergrande to the entire property sector in China and further to around the global economy.
Evergrande is the world’s most indebted property developer, is crumbling under the weight of more than $300 billion of debt, and warned more than once it could default. Is the Chinese property market a problem?
Let’s take a broader macroeconomic view of the Chinese property market to see if it is sane and compare it to the US property market.
As a way of reminder, note some key figures about China. The Gross Domestic Product (GDP) in China was worth $14.72 trillion US dollars in 2020, according to official data from the World Bank.
The World Bank found that if the Debt-to-GDP ratio exceeds 77% for an extended period of time, it slows economic growth. Every percentage point of debt above this level costs the country 0.017 percentage points in economic growth per year. China, for some, has been over this mark but still keeps growing – is this statistical reality about to catch up to China? For that matter, the US could be in the same boat.
Given China’s total debt as a percent of GDP and their GDP (see below), this would mean China has $49.32 trillion of total debt.
It was reported that Goldman recently calculated the China property sector is worth $62 trillion, making it the world’s largest asset class. To show context, in the US, the total combined value of all housing in the US is $36.2 trillion. If Goldman is correct, this represents a shocking reality for China.
Doing a simple ratio calculation comparing the US ratio of GDP to the property market value and then extrapolating to project a property value in China, we find:
$22.7 trillion (US GDP) : $36 trillion (US property value) = 14.7 (China GDP) : $23.31 trillion (projected China property market value)
And yet Goldman says the China property sector is worth $62 trillion, nearly three times the US ratio model or $38.7 trillion in excess.
Looking at it in another way, the ratio of total country debt to property value and then extrapolating to project a property value in China we find:
$203 trillion (US total debt) : $36 trillion (US property value) = 49.32 (China total debt) : $8.75 trillion (projected China property market value)
Taking again the Goldman China property sector assumption worth of $62 trillion, this ratio would say China is nearly seven times the US ratio model or $53.25 trillion in excess.
There are a few caveats to this analysis.
- Are Goldman’s assessments wrong, though others are not far off the Goldman estimate?
- Is the Chinese property market sane, and the US property market could expand to the same levels as China? This would appear not likely.
- Is China cooking the books, and the Chinese property has been way overestimated and/or not reflecting reality?
One could argue that the US economy is a house of cards of too much debt. If true, then the Chinese property market is even a bigger house of cards. Could the China property market turn into a global “Lehman moment?” Many financial gurus (here too) say no. But these same gurus said similar things before the 2008 Great Recession. Remember this quote from Arthur Laffer before the 2008 crash?
“This economy is driven by good economic policy, by good monetary policy, by good trade policy, and it’s working beautifully.”
Pulling on the string of the Evergrande story, one wonders what we will find. What could go wrong?