Alongside a booming energy market, wobbles in China’s real estate sector (see: Evergrande) was the dominant narrative in September markets.

For now, global investors have assessed that — while opaque — any debt problems in China’s property market probably won’t lead to a global contagion event.

Randal Jenneke, head of Australian Equities at asset manager T.Rowe Price, says any downturn in China is unlikely to spill across every major ASX sector.

However, it will be “a game-changer for the miners”.
 

Stop the ride?

Record-high iron ore prices this year flowed through to bumper profits and juicy dividends from the ASX’s mining heavyweights.

The subsequent price slump was followed by some underwhelming production updates from both Rio Tinto (ASX:RIO) and BHP (ASX:BHP).

As Stockhead’s Josh Chiat pointed out earlier this week, so far the iron ore majors have managed to “fail upwards” via their own reduced supply, which has kept spot prices supported (along with some familiar help from Brazil’s Vale).

But the latest research from CBA suggests that China really is committed to capping second-half production steel production so 2021 ends up looking like 2020.

Last night, another Chinese property developer – SINIC Holdings — defaulted on outstanding debts of its own.

The next key default date for Evergrande is this Saturday, which marks the deadline for an $83.5m bond interest payment for which it was given a 30-day grace period last month.

“It should be noted that the developer debt debacle is a fluid one and considerable uncertainty remains,” Jenneke said.

There’s always the possibility of a state-led bailout. Chinese leader Xi Jinping has also communicated two policy shifts in 2021 — a renewed focus on decarbonisation, and the political ideal of “common prosperity” to address the issue of rising inequality.

Demonstrating the complexity of those shifts, reports emerged this week that Xi has faced pushback on plans for a national property tax that would (in part) be aimed at curbing real estate speculation.

Adding it all up, the China of today is “a very different country relative to any time in the past 30 years, not only economically, but also in terms of policy directions and foreign relations”, Jenneke said.

“Ultimately, this may mean the ride that many of the miners have enjoyed from climbing Chinese iron ore imports may have peaked,” he added.

Analysis from T.Rowe Price shows that the 20-year structural increase in China’s monthly iron ore imports has now “plateaued”, Jenneke said.

“This will pose challenges for the purer iron ore players in Australia.”

“So while we do not believe the issues facing Evergrande or the broader Chinese policy agenda will define broader Australian equity market returns, the latter will be a game-changer for the miners.”

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