House of cards: Goldman Sachs cuts MSCI China's earnings growth to zero

• Goldman Sachs has cut MSCI China index’ earnings forecast from 4% to 0, underlining its bearish outlook for the Chinese economy.
• Overall, the MSCI China index includes 717 companies, tracking 85% of the equities in the large and mid-cap segments.
• China’s housing sector crisis could risk the world’s second largest economy’s post-Covid recovery.

Goldman Sachs has cut MSCI China index’s earnings forecast to zero as China’s housing bubble inches closer to bursting. The investment bank cut its forecast from 4% to 0%.

MSCI China index tracks China’s large and mid-cap companies – with over 717 companies. The index captures 85% of China’s large and mid-cap equities, including companies like Tencent, Alibaba, China Construction Bank, Baidu, and Industrial and Commercial Bank of China, among others.

The MSCI China index is down 18% in 2022 so far – nearly 7% of this decline has come in July alone due to a slump in China’s housing market, among other recessionary concerns.

What’s going on with the Chinese housing market?

According to a report earlier today, home prices in China fell 0.5% in June after buyers refused to pay mortgages. To assuage property developers, China is reportedly extending loans at the fastest pace in three years – since before the Covid pandemic broke out in early 2020.

"There is a real crisis-like situation in China and the authorities are aware of this. They are taking all measures required to address this. But we will have to wait and watch to understand how things take shape in the coming months," a person engaged with the education sector in China told India Narrative.

This fall of this house of cards was triggered by the second largest property developer in China, Evergrande. It had piled up debts worth $300 billion outstanding and in August last year, it warned that it would miss a crucial repayment deadline.

It did. And this contagion later spread to major property developers like the Kaisa Group, Modern Land, Fantasia Holdings, Sunac, among others.

To rein in a housing sector crisis that relies heavily on debt, the Chinese government passed the “three red-line” rule in 2020.

By October 2021, 14 out of China’s 30 largest property developers fell afoul of this rule. These developers had total sales amounting to $672 billion in 2020, showing how deep the Chinese housing crisis is.

Looking at China’s housing crisis and “unresolved problems” due to Covid, Goldman Sachs cut China’s GDP forecast to 3.3% from 4%. Analysts at Nomura suggest that the Chinese housing sector has “deteriorated beyond even our bearish expectations”.

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