What is the exposure of European enterprises to the struggling real estate industry in China?

China’s faltering real estate industry has caused a ripple effect for several European enterprises.
ADVERTISEMENTSeveral shocks have hit China’s real estate industry in recent years, compounded by the pandemic, as well as slower economic growth and weaker demand. The initial blow was dealt with by the near collapse of the major real estate company Evergrande, which took place in 2021. Following that, other prominent Chinese real estate developers including Country Garden, Fantasia Holdings, Sunac, and Kaisa Group have also experienced severe decline. Country Garden has witnessed a drastic 82% plunge since the beginning of this year, with Sunac also dropping by about 65% during the same period. Evergrande, Fantasia Group, and Sunac, among others, had to halt trading for several months as they worked to stabilize their positions. In October 2023, China’s newly built house price index recorded a 0.1% year-on-year decline for the fourth consecutive month. The main contributors to this figure were Guangzhou, Shenzhen, and to some extent, Beijing.China has already announced various measures to support the real estate sector, such as low-cost financing amounting to around €126 billion for the development and renovation of urban villages. The country has also unveiled measures to promote affordable housing and ease financial burdens on consumers, including lower mortgage rates and tax cuts for families with children and retirees. However, ultimately, these initiatives may still prove inadequate, leading to mounting calls for more prolonged and comprehensive stimulus measures. Halfway across the globe, European firms are feeling the pressure. With a number of European enterprises having stakes in the Chinese real estate sector, Europe has also been impacted, with investors closely monitoring developments in China. Ashmore Group, a UK investment manager specializing in emerging markets, is one of the worst-affected European enterprises, holding over $500 million (€460 million) of Evergrande bonds. The group has witnessed a 37% decline in performance since early February this year, trading at €2.06 at the time of writing. Most European firms investing in China primarily do so through exchange-traded funds, allocating their capital across a range of Chinese industries. Many of these funds are based in Luxembourg and have significant investments in the Chinese property and financial sectors. The Schroder All China Equity fund has also plummeted by more than 28% since late January this year. It currently allocates 1.04% to Chinese real estate while having 5.33% in materials, 10.47% in financials, and 12.88% in industrials. Investment firm Abrdn channels its funds into China through its closed-end China Investment Company, which has slid approximately 32% since mid-January this year. The firm allocates 9.3% to tech conglomerate Tencent, with distilleries company Kweichou Moutai, e-commerce giant Alibaba, and China Merchants Bank also accounting for a substantial portion of the portfolio. Swiss lender UBS’s MSCI China Fund has also declined by almost 20% since late January 2023. Barclays is another major European player in China, with its own RMB-denominated fund as well as ambitious plans to enter the local asset management sector. Often, Chinese giants such as Tencent and Alibaba hold large shares in the portfolios of these funds, exposing them to indirect risk from the real estate sector. This is due to Tencent’s substantial investments in real estate companies like Dalian Wanda Group. Alibaba has also encountered setbacks in the real estate sector, including its ill-fated Tmall Haofang real estate trading platform venture, which it was ultimately forced to sell. ADVERTISEMENTCar manufacturers BMW, Daimler, and Volkswagen are among the most prominent European enterprises channeling funds into China. Their involvement with the Chinese real estate industry is considerably intricate, as these enterprises require the establishment of various facilities, including corporate offices spread across major Tier 1 cities such as Beijing and Shanghai, as well as regional hubs like Chongqing and Wuhan. They also need to set up factories, manufacturing, and assembly bases in more cost-effective locations outside of cities. In contrast, high-tech and sophisticated operations such as research and development also need to be based in major cities, where greater facilities and talent are available. Similarly, chemical giants like BASF have also made significant investments in Chinese real estate, unveiling a monumental €10 billion complex in 2022, located in Zhangjiang. These enterprises depend on the local Chinese real estate sector not only for the initial site selection, but also, in many cases, for later consolidation of several facilities into more extensive complexes, typically undertaken once a company achieves a certain level of growth and revenue in the host country.ADVERTISEMENT It’s not just Europe The impact of China’s real estate sector is not limited to European enterprises; several US companies are also feeling the pressure. These include JPMorgan Chase, BlackRock, Nike, Apple, and Tesla. Companies such as Apple, Nike, and Tesla have substantial factories based in China that heavily rely on real estate advantages such as inexpensive land and tax incentives. Currently, the world’s largest iPhone factory is in China, and Tesla also has its Gigafactory located there. According to the International Monetary Fund (IMF), the Chinese economy “is expected to slow in 2024 to 4.6% amid continuing weakness in the property market and subdued external demand.” The IMF further emphasizes that despite the recent property stimulus measures in China, more will be needed to further bolster the sector. This includes simplifying exit procedures for developers involved in unprofitable ventures, as well as streamlining housing price adjustments. More financial support for completing projects would also be required, as well as assistance for companies to transition and adapt to a less active property market.ADVERTISEMENT

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