Brian McCarthy, the managing principal of Macrolens, wants to raise the alarm. As someone who predicted our global downturn, he now expects the largest Chinese property developers to soon turn into “zombies.” His critique comes on the heels of a major rebound in Chinese property shares. He argues this recent spike might be the first shot of a cannon that announces a speculative frenzy of investors on the hunt for value.
McCarthy has been especially worried that bondholders and shareholders of the big developers, especially Evergrande, will be “largely wiped out.” This forecast is born out of the persistent economic ruin that these transportation companies continue to face. It is indicative of the greater economic context in China. Even after this surge in the stock market, he maintains that positive movements like this aren’t backed by any fundamental positive news.
The rally in Chinese property stocks has been notable not just for its size but for an almost surreal disconnect from reality. Per McCarthy, this surge does not mean any meaningful progress has been made on the underlying health of the sector. Instead, it indicates that investors may be chasing speculative risk. They might simply not be making choices that reflect economic fundamentals.
McCarthy brings further attention to the effects of the anti-involution campaign being waged by Beijing to correct inefficiencies and over-leveraging embedded in the economy. He cautions that businesses are battling some powerful headwinds. Without much guidance or oversight, many of them will find themselves mired in debt. Together, this creates an untenable financial environment for smaller, independent development firms. It further sparks doubts about the broader state of the Chinese economy.
Within this context, the term “zombies” refers to firms that continue operating despite being economically bankrupt. Instead, we see that they tend to be pretty deeply burdened by debt. Regardless of the cause, McCarthy’s assessment paints a horrifying picture. Large private property developers will be allowed to continue to function without a credible recovery plan, relying instead on government bailout or debt restructuring.