Chinese property woes trigger ‘dramatic shift’ into US stocks

The Chinese property sector has emerged as the biggest threat to the stability of the global economy, fuelling a “dramatic shift” out of emerging market stocks and into the US, according to a closely watched investor survey.

A third of fund managers named Chinese commercial real estate as the most likely source of a “systemic credit event” in the September instalment of Bank of America’s monthly poll, with the proportion more than doubling since last month to eclipse concerns over US commercial property.

The highly indebted sector, which drives about a quarter of China’s economic activity, has been stuttering since developer Evergrande defaulted on its dollar-denominated debts in late 2021.

Its woes have deepened in recent weeks, as developer Country Garden missed payments on its overseas debt, exacerbating worries about a wider economic slowdown and dragging down the broader Chinese stock market, which suffered record outflows from foreign investors in August.

The company avoided a technical default last week by making the payments within a grace period.

China’s renminbi tumbled to a 16-year low against the US dollar last week, falling past the nadir it hit a year ago when much of the country was locked down under President Xi Jinping’s zero-Covid policy. Chinese growth expectations have also returned to “lockdown lows” with a net zero per cent of investors expecting the economy to strengthen over the next 12 months.

The BofA survey of 258 money managers with $678bn in assets under management suggests that investors are positioning for further pain for China’s stock market, which has lagged far behind its European and US counterparts this year.

Just over a fifth of managers surveyed said they thought shorting Chinese equities was the “most crowded” trade in financial markets. Only bets on a rise in big technology stocks were seen as a more popular trade. In turn, investors jumped back into US stocks, with allocations rising from 22 per cent net underweight in August to 7 per cent overweight in September. Allocations to emerging market equities fell sharply in what BofA called a “dramatic shift in relative exposure”.

Policymakers in Beijing have attempted to confront weakness in the property sector with a flurry of stimulus measures last month, including an increase in personal income tax allowances and a reduction in minimum mortgage downpayments.

But the actions have fallen short of the “bazooka” many investors think is required. Only 12 per cent of allocators expected a big fiscal stimulus funded by the issuance of government bonds, according to the BofA survey. Just over half of investors expected further targeted support for the real estate sector from Beijing, while 15 per cent said they thought that no meaningful stimulus measures were on the way.