Related to the news around Evergrande: https://www.reuters.com/markets/asia/evergrande-shares-set-open-down-38-amid-uncertainty-over-debt-revamp-plan-2023-09-27
Many, many analysts have predicted the impending doom of China wrt to building ghost cities, unsustainable infrastructure spending, municipal governments taking on huge loans, and an inevitable bubble.
There are plenty of articles arguing so:
NYT: China Is on Edge as Fallout From Its Real Estate Crisis Spreads
Industry report: Why China’s housing policies have failed
Bloomberg: China’s Debt-Fueled Housing Market Is Having a Meltdown, Again
If and when this will happen is a very important question, with widespread consequences and plenty of opportunity to cash in on accurate forecasting.
The question is: will there be a crisis in China in the real estate/housing/construction sector in the next year?
By 27th September 2024
If the crisis is very transient, similar to Covid in US, and everything is back to business as usual by the deadline, it's still counts as "YES"
If the Chinese governemnt takes on insanely huge loans, but prevents the crisis, that does not count as "YES"
I am intentionally vague with my definition of crisis, but here are some things that would cause me to resolve this as YES:
multiple reputable publications (e.g. Reuters, Bloomberg, Al Jazeera) writing about a construction crash, housing bubble popping, etc. Not about impending danger, but about currently ongoing stuff.
multiple large companies like Evergrande declaring bankruptcy
municipal governments defaulting on bonds
sudden drop in stock value in the sector, of at least 30% sustained over a week or more
large drop in real estate value
large drop in new units being built
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1,000
3.00(edit: Nevermind, I refreshed the page and saw your comment on market resolution. Sorry!
Original comment below:)
I obviously agree with the YES resolution; can you write about what pushed your opinion over the edge?
Press review since the last update on this market:
China’s home prices had the steepest annual decline in nine years last month
The rescue plan is not working
Earlier this year, the received wisdom was that China’s problem was housing. A real estate building bubble burst, leaving behind enormous overcapacity and lots of overly indebted property developers, and denting household wealth in the process.
https://www.ft.com/content/18666712-24af-450b-84a7-4258e71b685d
To some extent, the economy is entering a protracted process of digesting the impacts of the bursting of the real estate bubble that had helped sustain a borrowed prosperity for more than a decade.
https://www.chinadaily.com.cn/a/202409/18/WS66ea1138a3103711928a84de.html
I think this, combined with the other evidence I and others listed below, is enough to resolve the market as YES.
Overall, I regret that the resolution criteria was not more clear.
Financial Times (13 August): Chinese government bond market signalling deflation risk
Letter to the editor in response (19 August):
Investors should take seriously the warning about the risk of chronic deflation in China driven by property collapse... Demand for homes closely follows the number of marriages, and in turn reflects the number of births, with a 29-to-30-year time lag, and births have fallen from 20.6mn in 1995 to a mere 9.0mn in 2023.
... Prices of leading building materials (rebars, cement and glass) have all fallen by around 33 per cent since March 2020.
Financial Times (21 August): China's central bank had announced capital support for banks to lend towards real estate purchases and property developers, but banks are unwilling to take on the credit risk, and have only lent out 5% of this funding.
This is such a tough market to manage. Overall it extremely close to resolution on several resolution criteria, but not quite there yet.
1) some news sources write about a "slump" or a "crisis" or a "crunch", but not quite about a "bubble popping" or a "crash".
2) Evergrande is has been ordered to liquidate. Country Garden is in deep trouble, but not bankrupt yet
3) Some vehicles associated with municipal governments have defaulted.
4) as @Ciuccio pointed out below, the real estate indices are in deep decline for years now - but no sudden drop
5) The residential properties market seems to be in deep trouble, but that doesn't stop new units being built (completed)
Additionally, there have been a bunch of measures to prop up the sector, with lukewarm results.
I feel like any further bad news, or even lack of good news, would be enough to resolve this market as "yes".
@marktwse Hey, I was inactive and somehow missed your comment.
Very good research! I'll definitely lean on that, come resolution time.
And yes, definitely for this market navigating the resolution criteria is just as difficult as forecasting itself. I thought about different options, but there is no good way to define housing crisis/bubble popping - clear cut and objective. Or at least I couldn't figure it out. I should have addressed developments that were already happening, though.
Nonetheless, it is an important question to try to forecast, even if it's hard to be objective. Literally billions of dollars are on the line.
I hoped for more activity here, even arbitrage with different real-money options.
@marktwse also, regarding what is a sufficient stock index drop, I addressed this in a comment below:
50% drop in new units being built in a given quarter, year over year comparison
30% drop in real estate indices (sustained for more than a few days)
The S&P China real estate indices (https://www.spglobal.com/spdji/en/indices/equity/sp-china-a-1800-real-estate-sector-index/#overview and https://www.spglobal.com/spdji/en/indices/equity/sp-china-a-300-real-estate-sector-index/#overview) are showing 30% declines YoY, and even bigger declines (~50%) from their peaks. How many more days do they need to stay here to qualify as sustained to get a YES? Or do we also need to see the QoQ declines in new units?
Hi @Ciuccio
I'm sorry, but I don't think this qualifies. From the market description above:
"sudden drop in stock value in the sector, of at least 30% sustained over a week or more"
So gradual decline over years does not work. Otherwise I'd have to close the market on the day I opened it.
I think it's fair to consider "sudden drop" as a 30% drop within a 3 month period.
I realize this may be disappointing to hear, but please keep in mind that I hold no stock in this market, and it's very tricky to define objective criteria.
I didn't give precise definitions intentionally, this is really vague and I wanted to leave myself sufficient flexibility. Note that I don't hold any stock in this market.
However, I feel the following numbers are fair:
50% drop in new units being built in a given quarter, year over year comparison
30% drop in real estate indices (sustained for more than a few days)