China has witnessed a lending boom ever since the Global Financial Crisis (GFC) in 2008. Companies and the country have become reliant on access to ever-larger amounts of credit for sustained growth. While overall debt levels may be on a par with the US or the UK (non-financial sector credit to GDP currently stands at roughly 260%), it is the pace of growth over the last decade that is staggering. Chinese debt to GDP has grown by more than 110 ppts since 2007, compared to 20-45 ppts in the UK & US over the same period.

The government, concerned about systemic risks to the economy if debt levels were to continue to rise unchecked, has taken dramatic steps to curb the informal lending (shadow banking) sector, increase transparency and regulatory oversight of financial markets and local government finances, and slow the overall growth in debt. The slowing of credit growth, in addition to ongoing global trade tensions, has exacerbated the structural slowdown in the economy that was already impacting corporate cash flow and profits.

The inability of corporates (both developers and others) to service debt or roll over maturing debt commitments has led to a rise in bankruptcies, defaults and non-performing loans in recent years. Most loans are typically secured against property, unlike in other markets, as they are comparatively easy to value and seen as a relatively secure store of worth. The rise in defaults, and consequently the increasing volumes of NPLs, therefore represents a substantial opportunity for investors to access a range of the real estate assets at a discount to market pricing.