Major Crisis Deepens

The court-ordered liquidation of South City marks a serious escalation in the property crisis. This indicates that government support is lacking and creditors are losing patience. This situation casts a bleak view on Chinese markets for the near future. Looking back at the early 2024 Evergrande liquidation helps us predict the current market reaction. We expect increased volatility and a sell-off in Chinese stocks, especially those in the Hang Seng China Enterprises Index. Traders should think about buying protection through put options or preparing for a rise in implied volatility. This news comes during a time of already weak conditions. In July 2025, new home prices fell by 5.4% compared to the previous year, marking the 15th consecutive month of decline. This ongoing weakness indicates that the South City failure is not just a single incident, but a sign of a much greater issue. The property sector’s decline is heavily impacting the wider economy, with GDP growth for Q2 2025 falling to just 3.8%. Given these conditions, we recommend shorting broad market index futures like the FTSE China A50. This strategy bets on the continued negative effects from the real estate sector.

Economic Consequences

The stress on China’s economy will almost certainly affect its currency. We expect the offshore yuan (CNH) to weaken against the US dollar as investors look for safer options. This situation will likely also hurt the demand for commodities, especially industrial metals. Iron ore prices on the Singapore Exchange have already dropped below $100 per tonne this month due to poor construction forecasts. Policymakers have attempted to step in, with the People’s Bank of China lowering its key loan prime rate by 10 basis points last week. However, the severity of this crisis suggests these small changes will not restore confidence. We see these efforts as too minor and too late, meaning any short-lived market rally driven by policy changes is an opportunity to sell. The most immediate response should focus on the financial sector, which is heavily exposed to property developer debt. We are looking at put options on major Chinese banking stocks or ETFs that track this sector. The risk of a banking crisis has significantly increased. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now