global perspectives

Chinese real estate: from idiosyncratic to systemic risk

Chinese real estate: from idiosyncratic to systemic risk
Nivedita Sunil - Portfolio Manager

Nivedita Sunil

Portfolio Manager
Florian Ielpo - Head of Macro, Multi Asset

Florian Ielpo

Head of Macro, Multi Asset

In the latest instalment of Simply Put, where we make macro calls with a multi-asset perspective, we consider whether the Chinese property market has transitioned from idiosyncratic risk to systemic risk.   


Need to know

  • The Chinese property market has experienced a significant slowdown following the central government’s acute tightening of regulation.
  • Over the past quarter, risk for the sector has shifted from idiosyncratic to systemic, with a 30% default rate costing approximately USD 50 billion.
  • The Chinese authorities are now partially loosening some of their restrictions and the PBoC has cut its reserve requirement ratios, meaning the risk of contagion looks more under control for now.


The Chinese property market has made headlines recently. Primary market sales have seen an eye-popping collapse of around 30% during the last two months. Similarities with the demise of Lehman Brothers resonate eerily in investors’ memories. But what is really going on? Do we have Lehman Brothers 2.0 on our hands or will it be different this time?

At the beginning of the year, the Chinese government strengthened its rules to realign the real estate sector, stating that “housing is for living and not for speculation”. It believes that marginal demand for property has been driven by speculative demand rather than by pure underlying demand for the last few years. The result is that property affordability has been pushed down for the middle class in urban areas.

More than 400 new regulations have been issued to tighten the real estate market, including curbs on mortgages and bank loan disbursement.  At the tightest point of policy, in October, it took a homebuyer up to six months to obtain a mortgage that had previously only taken around one month. Property developers had been taking advantage of various funding channels both onshore and offshore to increase their scale and expand into non-core business activities. Yet, these new policies have caused Evergrande1, formerly one of the most valuable real estate companies in the world, to enter into a technical default and led to its bond yield skyrocketing.


Stressed funding for property developers

More globally, property developer funding has been extremely stressed. Liquidity abruptly dropped from twelve months to just one month as various restrictions took hold and the Evergrande fall-out continues to rumble on in the background. At first, this issue only affected Evergrande and not the market as a whole. However, as the government continued to tighten its rules, more and more property companies started to default (Fantasia Holdings, Modern Land China1).

In our view, what started as an idiosyncratic risk has now become a systemic one. There is a 30% default rate in the offshore USD China high yield real estate market.  In addition, as shown on chart 1, Chinese credit default swaps (CDS) have started to price in the risk of default – a clear sign that risk has become systemic.


Chart 1. China CDS versus Evergrande 2022 Bond Yield

 Source: Bloomberg, LOIM.


The Chinese real estate sector is worth USD 60 trillion, encompassing 60% of household wealth and representing of up to 30% of the country’s GDP both directly and indirectly.  If it collapses, the effects could ripple across the board, potentially leading to a decline in economic activity, as occurred in 2015. Indeed, there is also a high risk of contagion as the activities of real estate developers cascade down the supply chain (for example, unpaid contractors, unbuilt homes).

We estimate that a 10% reduction in construction equates to a 2% loss in GDP and, based on the current state of private sector property developers’ funding, we believe annualised construction levels could be reduced by as much as 30-40% if these stresses continue. All eyes are now on the Chinese government. Will it bail out Evergrande or will it relax its policies?

All eyes are now on the Chinese government. Will it bail out Evergrande or will it relax its policies?


In our view, sticking with the status quo would be politically and economically untenable for China, especially as a third term for President Xi starts next year. As a result, we expect some form of policy response for the sector, which can already be observed in Chart 2. The People's Bank of China (PBoC) has now recognised the significance of the situation and has decided to cut its reserve ratio by 50 bps. This policy move implies two things:

  1. The housing market is now a clear systemic risk for the Chinese economy;
  2. The risk of contagion is being taken seriously by policy makers, who are actively taking action.

This point is also clearly shown in chart 1. The recent increase in Evergrande’s yield was accompanied by a decrease in the Chinese CDS. This suggests that markets seem to be regaining their faith in the authorities’ intent to cushion this risk and are therefore less inclined to adopt the contagion narrative. We expect the authorities to institute new policies that should reduce stress for real estate developers in order for them to obtain funding at reasonable and sustainable yields.  As pressure is eased, we believe higher quality debt will rally from current stressed and elevated yield levels.


Chart 2. China Reserve Requirement Ratio (in %)

Source: Bloomberg, LOIM.


Simply put, we believe the Chinese regulatory clampdown on the property market has transitioned into a systemic risk. With the PBoC stepping in this risk should now be cushioned, opening the door to a period of stabilisation.



Click here to read more of the team’s views on this topic.



1 Any reference to a specific company or fund does not constitute a recommendation to buy, sell, hold or directly invest in the company or funds. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the funds discussed in this document.

informations importantes.

À l’usage des investisseurs professionnels uniquement
Le présent document a été publié par Lombard Odier Funds (Europe) S.A., société anonyme (SA) de droit luxembourgeois, ayant son siège social sis 291, route d’Arlon, 1150 Luxembourg, agréée et réglementée par la CSSF en tant que Société de gestion au sens de la directive 2009/65/CE, telle que modifiée, et au sens de la directive 2011/61/UE sur les gestionnaires de fonds d’investissement alternatifs (directive GFIA). La Société de gestion a pour objet la création, la promotion, l’administration, la gestion et la commercialisation d’OPCVM luxembourgeois et étrangers, de fonds d’investissement alternatifs (« FIA ») et d’autres fonds réglementés, d’organismes de placement collectif ou d’autres véhicules d’investissement, ainsi que l’offre de services de gestion de portefeuille et de conseil en investissement.
Lombard Odier Investment Managers (« LOIM ») est un nom commercial.
Ce document est fourni à titre d’information uniquement et ne constitue pas une offre ou une recommandation d’acquérir ou de vendre un titre ou un service quelconque. Il n’est pas destiné à être distribué, publié ou utilisé dans une quelconque juridiction où une telle distribution, publication ou utilisation serait illégale. Ce document ne contient pas de recommandations ou de conseils personnalisés et n’est pas destiné à remplacer un quelconque conseil professionnel sur l’investissement dans des produits financiers. Avant de conclure une transaction, l’investisseur doit examiner avec soin si celle-ci est adaptée à sa situation personnelle et, si besoin, obtenir des conseils professionnels indépendants au sujet des risques, ainsi que des conséquences juridiques, réglementaires, financières, fiscales ou comptables. Ce document est la propriété de LOIM et est adressé à son destinataire pour son usage personnel exclusivement. Il ne peut être reproduit (en totalité ou en partie), transmis, modifié ou utilisé dans un autre but sans l’accord écrit préalable de LOIM. Ce document contient les opinions de LOIM, à la date de publication.
Ni ce document ni aucune copie de ce dernier ne peuvent être envoyés, emmenés ou distribués aux États-Unis, dans l’un de leurs territoires, possessions ou zones soumises à leur juridiction, ni à une personne américaine ou dans l’intérêt d’une telle personne. À cet effet, l’expression « Personne américaine » désigne tout citoyen, ressortissant ou résident des États-Unis d’Amérique, toute association organisée ou existant dans tout État, territoire ou possession des États-Unis d’Amérique, toute société organisée en vertu des lois des États-Unis ou d’un État, d’un territoire ou d’une possession des États-Unis, ou toute succession ou trust soumis dont le revenu est imposable aux États-Unis, qu’en soit l’origine.
Source des chiffres : sauf mention contraire, les chiffres sont fournis par LOIM.
Bien que certaines informations aient été obtenues auprès de sources publiques réputées fiables, sans vérification indépendante, nous ne pouvons garantir leur exactitude ni l’exhaustivité de toutes les informations disponibles auprès de sources publiques.
Les avis et opinions sont exprimés à titre indicatif uniquement et ne constituent pas une recommandation de LOIM pour l’achat, la vente ou la détention de quelque titre que ce soit. Les avis et opinions sont donnés en date de cette présentation et sont susceptibles de changer. Ils ne devraient pas être interprétés comme des conseils en investissement.
Aucune partie de ce document ne saurait être (i) copiée, photocopiée ou reproduite sous quelque forme et par quelque moyen que ce soit, ou (ii) distribuée à toute personne autre qu’un employé, cadre, administrateur ou agent autorisé du destinataire sans l’accord préalable de Lombard Odier Funds (Europe) S.A. Au Luxembourg, ce document est utilisé à des fins marketing et a été approuvé par Lombard Odier Funds (Europe) S.A., qui est autorisée et réglementée par la CSSF.
© 2021 Lombard Odier IM. Tous droits réservés.