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SORTing It Out: ReCode Expands Beyond Respiratory Disorders

The funding will also allow ReCode to advance its PCD and CF programs into the clinic, and further develop its genetic medicine delivery platform to deliver…



ReCode Therapeutics CEO Shehnaaz Suliman, MD, MPhil [Photo by Jennifer Leahy]
While ReCode Therapeutics moves toward human trials for its lead programs in primary ciliary dyskinesia (PCD) and cystic fibrosis (CF) over the next year, the company is already looking ahead to expanding its pipeline beyond treating respiratory disorders through a recently completed Series B round.

The expanded Series B adds $120 million to the $80 million that ReCode raised in its initial second round last fall. More importantly, the additional financing brings with it more big-name biopharma investors, as the venture capital arms of Bayer and Amgen join those of Pfizer and Sanofi as backers of the company.

“The reason we went back to expand on our B round was to expand and diversify the potential of this platform to new tissue types and new forms of genetic medicines,” ReCode CEO Shehnaaz Suliman, MD, MPhil, told GEN Edge.

“With this fundraising, we now have the ability to target additional tissues, such as the central nervous system and oncology. These allow us to really maximize the potential of this differentiated platform, while at the same time enabling us to get into the clinic with our lead programs.”

The expanded Series B brings ReCode’s total capital raised to $280 million—enough to extend the company’s capital runway another year to the end of 2024. ReCode said the new proceeds will enable it to fund pipeline expansion into as-yet-unspecified central nervous system (CNS), liver, and oncology indications.

The funding will also allow ReCode to advance its PCD and CF programs into the clinic, and further develop its genetic medicine delivery platform to deliver additional treatments—from gene correction modalities and small interfering RNA (siRNA) therapies—to a wider range of target cell types both predictably and programmable.

The financing will also enable ReCode’s planned expansion from a space shared with five other startups to its own 30,000-square-foot facility in Menlo Park, CA, where the company is based, as well as the company’s workforce, which will grow from about 70 people at present to about 100 by year’s end.

ReCode’s planned expansion—which would buck the trend of retrenchment by private biotechs as financing markets have declined over the past year—reflects growing interest in non-viral lipid nanoparticles (LNPs) and other delivery vehicles for targeting cells linked to specific diseases.

A June 10 report by McKinsey & Co. projected that more than 400 RNA-based therapies in development phases will require targeted delivery mechanisms—yet companies specializing in LNP delivery had seen up to that time “relatively small” funding rounds of around $25 million each, around half of the $45 million average deal size for drug delivery companies.

Five lipid approach

ReCode develops genetic medicines based on its own selective organ targeting (SORT) delivery platform—a platform of LNPs designed to deliver treatments with precision, as well as safely and effectively. SORT LNP is an approach to tissue-specific mRNA delivery and gene editing in which LNPs are systematically engineered to exclusively edit extrahepatic tissues and therapeutically relevant cell types.

ReCode licenses SORT LNP technology from the Texas laboratory of Daniel J. Siegwart, PhD, a co-founder of ReCode and scientific advisor to the company. His lab reported the first non-viral system for in vivo CRISPR-Cas gene editing in December 2016. (Siegwart is the W. Ray Wallace Distinguished Chair in Molecular Oncology Research at the University of Texas Southwestern Medical Center, where he is also Director of the Program in Genetic Drug Engineering, Director of the Drug Delivery Program in the Department of Biochemistry, Department of Biomedical Engineering (BME), and Co-leader of the Chemistry and Cancer Program at the Simmons Comprehensive Cancer Center.)

“The current data disclosing the high degree of editing in specific cells positions the discovery of SORT LNPs to treat an array of diseases in a highly accurate manner… SORT may open new avenues of development for gene correction therapeutics,” Siegwart and colleagues concluded in a 2020 study detailing SORT LNP, published in Nature Nanotechnology.

While traditional, first-generation LNPs consist of four lipids and are primarily taken up by the low-density lipoprotein (LDL) receptor in the liver, limiting their usefulness for broad therapeutic applications, SORT LNPs are engineered with five lipids. The fifth is biochemically distinct from the others, which changes how the lipids interact with proteins inside the body—which in turn enables the lipids to be directed and delivered directly to different tissues, organs, and cell types beyond the liver.

“Ours is a five-component system, and the last one can be our choice of lipid,” Angele Maki, PhD, senior vice president and head of business development at ReCode, told GEN earlier this year.

By choosing whether to use an ionizable or charged lipid, Maki said, users of SORT LNP can target the lungs, spleen, or other organs beyond the liver.

Game changer

“Not only can we go to organs of interest, but we can go to specific cell types of interest within those organs,” Suliman said. “This is really a game changer because it means, for example, in the case of a CF patient that is unable to manufacture CFTR protein, that we can deliver the CFTR protein directly via an inhaled formulation into the secretory cells that lack of protein, and show that we’re able to upregulate protein expression by doing that.”

Genetic medicine “cargoes” can be delivered by messenger RNA (mRNA), silent RNA (siRNA), or gene correction modalities. Delivery is even potentially possible with DNA, something precluded when delivery occurs via viral vectors.

“With viral delivery, you rely on HeLa and AGK [acylglycerol kinase], mammalian cell cultures that need to be expanded, that are very expensive that are not really scalable,” Suliman explained. “But non-viral delivery is a synthetic chemical production methodology—there’s just chemistry, not as much biology, and cell culture. This means you can scale up significantly, as has been done with the COVID vaccines, do redosing, keep the cost of goods down. These are just some of the significant advantages that non-viral delivery platforms, such as LNPs have.”

Direct delivery, ReCode reasons, offers improved efficacy and potency over viral delivery methods, while limiting potential adverse effects.

David J. Lockhart. PhD, ReCode Therapeutics President and chief scientific officer [Photo by Jennifer Leahy]
“It was a very clever breakthrough, to be able to move beyond the box that the traditional four-component LNP field was in,” recalled David Lockhart, PhD, ReCode’s President and Chief Scientific Officer.

Speaking with GEN Edge last year, Lockhart said, “We chose the LNPs because they are a purely chemical approach. The components can be made with well-defined scalable chemistry. There are no peptide components, no viruses, and nothing that requires a bioreactor.”

ReCode says its use of LNPs has been borne out by the success of the messenger RNA (mRNA)-based COVID-19 vaccines developed by Pfizer and BioNTech as well as by Moderna.

Pipeline progress

Recode’s pipeline is anchored by preclinical inhaled and IV lead programs for CF caused by nonsense mutations, as well as an inhaled treatment for PCD. The CF treatment focuses specifically on the 10–13% of patients who have nonsense mutations that cannot fully benefit from current small molecule therapies.

At the American Thoracic Society (ATS) 2022 International Conference, held in May in San Francisco, ReCode presented positive preclinical data for both programs. The data showed that both the PCD and CF candidates can be precisely delivered directly to disease-relevant cells without significant exposure to other tissue, effectively releasing the encapsulated genetic cargo, and expressing the correct proteins at relevant levels.

“We’ll file the IND for primary ciliary dyskinesia in Q4 of this year, which means that we expect to be enrolling patients in Q1 next year. And the IND filing for CF will happen in the second quarter of next year, which means that we will be enrolling patients in the second half of next year,” Suliman said.

Lockhart said ReCode has shown the recovery of function in the gold-standard human cell model for both PCD and CF.

“In the PCD program, we’ve selected the lead mRNA We selected the lead delivery LNP and we’ve done full dose finding studies with safety and tox readouts. We’ve shown repeat administration in smaller animals and then we’ve done full dose finding in rats and non-human primates,” Lockhart said.

In the CF program, he added, ReCode has optimized the mRNA and drug formulation, and carried out repeated administration studies in mice. That program will also be moving into non-human primates later this year.

ReCode is also focused on developing therapies that deliver genetic cargo by applying gene editing/correction in target cells, including stem cells. The company plans to advance that modality through a collaboration that ReCode intends to launch with a “next-generation gene editing platform company” partner.

“Suffice to say, we have expansive interest from a wide variety of partners, not just on the technology synergy but on the SORT LNP platform itself,” Suliman said. “If you’re a biopharma partner and your interest is, for example, siRNA development, and you think about how to enhance the potency of your siRNA getting to the tissues and cell types of interest, the way to do that is with delivery.”

“We can actually enhance the potency of any genetic cargo by co-packaging that cargo with SORT LNP that will bring the two technologies together in a beautiful confluence of technology synergy,” she added.

Doubling expectations

Suliman joined ReCode in January when she succeeded Lockhart as CEO. Lockhart had been CEO of ReCode’s predecessor TranscripTx from 2014–2020, before he took the helm of ReCode when it was formed through an all-stock merger with TranscripTx. Lockhart oversaw the company’s successful oversubscribed $80 million Series A round, co-led by OrbiMed Advisors and Colt Ventures, with participation from MPM Capital, Vida Ventures, Hunt Technology Ventures, and Osage University Partners.

ReCode initially projected it would add $60 million to the Series B round when it began working to raise the additional capital.

All the original Series A investors were joined in the initial $80 million Series B round by co-leaders Pfizer Ventures and EcoR1 Capital, plus new investors that included Sanofi Ventures, as well as funds managed by Tekla Capital Management LLC, Superstring Capital and NS Investment.

As Suliman related on GEN’s Close to the Edge video series earlier this year, her career began as a physician in her native South Africa, where she received her MD from the University of Cape Town Medical School. She pivoted to investment banking about two decades ago, earning an MBA at Oxford University, then held positions at Lehman Brothers and later Petkevich & Partners.

A few years later, she embarked on a successful career as a biotech business development executive. At Gilead, Suliman held management roles of increasing responsibility between 2005 and 2010 and helped expand the company into new therapeutic areas, notably HIV, through M&A. She then held positions at Genentech and its parent company Roche, as well as at Theravance, where she put together a $1 billion profit-sharing partnership with Johnson & Johnson’s Janssen Biotech for its lead JAK inhibitor program before moving to Alector Therapeutics as president and COO.

“After I joined ReCode, we spent a few months together as a team really updating the strategy and execution plan for the company and for the SORT LNP platform,” Suliman recalled. “We hit the road on the financing in mid-April, and by mid-June, we will fully oversubscribed.”

The expanded Series B was co-led by new investors Leaps by Bayer and AyurMaya, with participation from Amgen Ventures. Alan Colowick, MD, MPH, managing director of Matrix, and Rakhshita Dhar, senior director of Venture investments Health at Leaps by Bayer, have joined ReCode’s Board of Directors.

“We have been incredibly fortunate in a challenging financing environment to connect with really sophisticated and thoughtful investors that understand the importance of following the science and generating good science and, importantly, understanding the importance of successful delivery as the key to unlocking the future of genetic medicine,” Suliman added.

“We really encourage others to stay the course and not give up, because if the science is compelling, the opportunity will be there.”

The post SORTing It Out: ReCode Expands Beyond Respiratory Disorders appeared first on GEN - Genetic Engineering and Biotechnology News.

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COVID Lockdown Protests Erupt In Beijing, Xinjiang After Deadly Fire

COVID Lockdown Protests Erupt In Beijing, Xinjiang After Deadly Fire

Protests have erupted in Beijing and the far western Xinjiang region…



COVID Lockdown Protests Erupt In Beijing, Xinjiang After Deadly Fire

Protests have erupted in Beijing and the far western Xinjiang region over COVID-19 lockdowns and a deadly fire on Thursday in a high-rise building in Urumqi that killed 10 people (with some reports putting the number as high as 40).

Crowds took to the street in Urumqi, the capitol of Xinjiang, with protesters chanting "End the lockdown!" while pumping their fists in the air, following the circulation of videos of the fire on Chinese social media on Friday night.

Protest videos show people in a plaza singing China's national anthem - particularly the line: "Rise up, those who refuse to be slaves!" Others shouted that they did not want lockdowns. In the northern Beijing district of Tiantongyuan, residents tore down signs and took to the streets.

Reuters verified that the footage was published from Urumqi, where many of its 4 million residents have been under some of the country's longest lockdowns, barred from leaving their homes for as long as 100 days.

In the capital of Beijing 2,700 km (1,678 miles) away, some residents under lockdown staged small-scale protests or confronted their local officials over movement restrictions placed on them, with some successfully pressuring them into lifting them ahead of a schedule. -Reuters

According to an early Saturday news conference by Urumqi officials, COVID measures did not hamper escape and rescue during the fire, but Chinese social media wasn't buying it.

"The Urumqi fire got everyone in the country upset," said Beijing resident Sean Li.

According to Reuters

A planned lockdown for his compound "Berlin Aiyue" was called off on Friday after residents protested to their local leader and convinced him to cancel it, negotiations that were captured by a video posted on social media.

The residents had caught wind of the plan after seeing workers putting barriers on their gates. "That tragedy could have happened to any of us," he said.

By Saturday evening, at least ten other compounds lifted lockdown before the announced end-date after residents complained, according to a Reuters tally of social media posts by residents.

Tyler Durden Sat, 11/26/2022 - 12:00

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US Jobs and Eurozone CPI Highlight the Week Ahead

Two high-frequency economic reports stand out in the week ahead:  The US November employment report and the preliminary eurozone CPI. The Federal Reserve…



Two high-frequency economic reports stand out in the week ahead:  The US November employment report and the preliminary eurozone CPI. The Federal Reserve has deftly distanced itself from any one employment report. As a result, it would take a significant miss of the median forecast (Bloomberg survey) to alter market expectations for a 50 bp hike when the FOMC meeting concludes on December 14.

Economists are looking for around a 200k increase in US non-farm payrolls after 261k in October. In the first ten months of the year, the US has created 4.07 mln jobs. This is down from 5.51 mln in the Jan-Oct period last week but a strong performance by nearly any other comparison. In the same period before the pandemic, the US created about 1.52 mln jobs. Non-farm payrolls rose by an average of 150k in 2018 and 2019. It is averaging more than twice that now.

Average hourly earnings have increased in importance now with greater sensitivity to inflation and fears among policymakers that it could get embedded into wage expectations. The year-over-year increase in average hourly earnings peaked in March (when the Fed began hiking rates) at 5.6%. It has fallen or been unchanged since and fell to 4.7% in October. Economists expect the pace to have slowed to 4.6%. The 4% rate, seen as more consistent with the Fed's goals, assumes 2% productivity, which has been difficult to sustain outside crises (around the Great Financial Crisis and Covid) since the middle of 2004.

The ECB is a different kettle of fish. Nearly all the voting members at the Fed that have spoken, including the leading hawks, seem to accept a downshifting from 75 bp to 50 bp. However, at the ECB, there appears to be a genuine debate. It hiked rates by 75 bp at the last two meetings after starting the normalization process with a half-point move in July. As a result, the month-over-month headline inflation surged by 1.2% in September and 1.5% in October. The year-over-year rate stood at 10.7% in October, 300 bp above the US. On the other hand, core inflation was 5% above a year ago in the eurozone compared with 6.3% in the US. The median forecast in Bloomberg's survey sees the headline rate easing to 10.4%, with the core rate unchanged.

This is leading some, like the Austrian central bank governor Holzmann to suggest that unless there is a sharp fall in the November report, he would be inclined to support another 75 bp hike when the ECB meets on December 15. The preliminary estimate of November CPI will be released on November 30, but the final reading will not be available until the day after the ECB's meeting. That said, revisions tend to be minor. While Holzmann is perceived to be one of the more hawkish members of the ECB, the more dovish contingent seems to be pushing for a slowing the pace to 50 bp. It is a bit too simple to make it into a North-South dispute. The ECB's chief economist, Lane, from Ireland, is in the 50-bp camp. The swaps market sees a little more than a 30% chance of a 75 bp hike next month. Countering the elevated price pressures is recognizing that the eurozone is slipping into a recession. Still, officials say it will likely be short and shallow, arguably giving them more latitude to adjust rates.

To be sure, the US also reports inflation. The Fed's targeted measure, the PCE deflator for October, will be released the day before the employment report. But, in this cycle, in terms of the Fed's reaction function, it seems to have been downgraded, and the thunder stolen by the CPI. Indeed, when Fed Chair Powell explained why the Fed hiked by 75 bp instead of 50 bp in June as it had led the market to believe, he cited CPI and the preliminary University of Michigan consumer inflation expectation survey (which was later revised lower). While the methodologies and basket of the PCE deflator are different than CPI, the former is expected to confirm the broad developments of the latter. A 0.3% rising in the headline PCE deflator will see the year-over-year pace slip below 6% for the first time since last November. It peaked at 7.0% in the middle of the year. The core rate is stickier and may have eased to 5% after edging up in both August and September.

The US economic calendar is packed in the days ahead. The S&P CoreLogic Case-Shiller house prices 20-city index are expected to have fallen for the third consecutive month (September). That has not happened for a decade. The FHFA house price index is broadly similar. It fell by 0.6% in July and 0.7% in August. The median forecast (Bloomberg survey) is for a 1.3% decline in September. If accurate, it would be the largest monthly decline since November 2008. The October goods trade balance and inventory are inputs into GDP forecasts. There continues to be a significant gap between the Atlanta Fed's GDPNow tracker (4.3%) and the median estimates in Bloomberg's survey (0.5%).

The JOLTS (Job Opening and Labor Turnover Survey) has become a popular metric in this cycle and has often been cited by Fed officials. It peaked in March at nearly 11.86 mln. It has erratically trended lower and stood slightly below 10.72 mln in September. It is forecast to have softened in October. The low for the year was set in August at 10.28 mln. In the three downturns since 2000, the peak in JOLTS has come well before a recession, and the bottom after the recession has ended.

While the cost-of-living squeeze is impacting consumption, the supply chains are normalizing, which is a powerful tailwind. This is at least partly the story in the auto sector. US auto sales reached 14.9 mln (SAAR) in October, the best since January and almost 15% from October 2021. In fact, in the three months through October, US auto sales are running 8.8% above the same three-month period a year ago. Still, US auto sales have averaged 13.73 mln through October, nearly 11% lower, at an annualized pace in the first ten months of 2021. Still, S&P Global Mobility analysis warns of softer November figures (14.1 mln). However, if the projection is accurate, it would be about 9.6% more than in November 2021.

There was some optimism that after the 20th Party Congress, China's Xi would have the authority and inclination to pivot on Covid, property, and foreign relations. Yet, Chinese and international medical experts have warned that China is woefully unprepared to relax its Covid policy regarding inoculation rates and medical infrastructure. The surge in cases has seen restrictions imposed on an area responsible for more than a fifth of the country's GDP. China's composite PMI has been falling since the year's peak at 54.1 in June. It fell below the 50 boom/bust level in October for the first time since May, and Q4 GDP appears to be slowing from the 3.9% quarter-over-quarter jump in Q3 after the 2.7% contraction in Q2. The world's second-largest economy may be growing around a third of the pace in Q4, with risks to the downside. The median forecast (in Bloomberg's survey) is for Q1 23 growth of 0.9%.

Aid to the property market may help stabilize the sector in the short term. Iron ore prices surged by more than 27% at the end of October through November 18 amid the optimism. However, this seemed anticipatory in nature as many of the new measures are slowly rolling out. Many observers share our doubts that the excesses of a couple of decades have been absorbed or alleviated. News that separate from the list of 16 measures to support the property market announced earlier this month, the PBOC is considering a CNY200 bln (~$28 bln) of interest-free loans to commercial banks through the end of Q1 to induce them to provide matching funds for stalled property markets, seems to be a subtle recognition that more efforts are needed. While new supply has stalled, we are concerned that the more significant issue is effective demand.  

Japan, the world's third-largest economy, unexpectedly contracted (-1.2% annualized rate) in Q3 but appears to be rebounding, likely aided by the new support measures (JPY39 trillion or ~$275 bln). Japan reports October employment figures. The unemployment rate has been 2.5%-2.6% since March. Japan has been successful in boosting the labor force participation rate. It was at 61.8% in early 2020 before Covid and has been at 62.9%-63.0% for four months through September. This is the highest since at least 2001. Retail sales, reported in terms of value (nominal prices), rose 1.3% and 1.5% in August and September, respectively. Another strong report would not be surprising. Government travel subsidies were widened in October. 

Japanese businesses were pessimistic about the outlook for industrial output in October. They anticipate a 0.4% decline after production fell 1.6% in September. The auto sector is a source of pessimism. Supply chain disruptions were cited for the dour outlooks of Toyota and Honda. Foreign demand is weakening, and Japanese exports are slowing. Japan's preliminary November manufacturing PMI slipped below the 50 boom/bust level to 49.4, its lowest in two years. 

Australia reported October retail sales and some housing data, but the newly introduced monthly CPI may have the most significance. The market is not sure that the Reserve Bank of Australia will hike rates at the December 6 meeting. The futures market has a little better than a 60% chance of a quarter-point hike. The cash rate is at 2.85%. In September, CPI made a new cyclical high of 7.3%. The trimmed mean measure stood at 5.4%, which was also a new high. We would subjectively put the odds higher than the market for a quarter-point hike. The next RBA meeting is on February 9, which seems too long for Governor Lowe to make good on his anti-inflation commitment.

Canada reports Q3 GDP and the November jobs. The Canadian economy is downshifting after enjoying 3.1% and 3.3% annual growth rates in Q1 and Q2, respectively. The pace is likely to be a little less than half in Q3 and appears to be slowing down more here in Q4. The median forecast (Bloomberg's survey) is for the Canadian economy contract in the first two quarters of next year. Canada created an impressive 119k full-time positions in October. Adjusted for the size of the economy, this would be as if the US created 1.3 mln jobs. In four of the past five quarters, Canadian job growth has been concentrated in one month. As one would expect, the following month has been a marked slowdown, and twice there were outright declines in full-time positions. After hiking by 100 bp in July, the Bank of Canada slowed its pace to 75 bp in September and 50 bp in October. The central bank meets on December 7, and the swaps market seems comfortable with a quarter-point hike.

Lastly, we turn to the Taiwanese local elections on November 26. The key is the mayoral contest in Taipei. It is seen as the most likely path of the presidency when Tsai-Ing's term ends in 2024. The great-grandson of Chiang Kai-shek is the candidate for the KMT, which wants closer ties to Beijing but rejects claims it is "pro-China." The DPP candidate is the health minister and architect of the country's Covid policy. The Deputy Mayor of Taipei is running as an independent candidate, but it looks like a two-person contest. Despite the US and Chinese defense officials agreeing to improve their practically non-existent dialogue, there is unlikely to be a meeting of the minds about Taiwan. Changes in the constellation of domestic political forces within Taiwan seem to be the most likely component that may change what appears to be an inexorable deteriorating situation. Both Beijing and Washington have good reason to believe the other is trying to change the status quo. 


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China’s Housing Crisis: What Investors Need to Know

China’s economy has grown from near irrelevance to the second largest in the world in less than half a century. Perhaps more incredible than its meteoric…



China’s economy has grown from near irrelevance to the second largest in the world in less than half a century. Perhaps more incredible than its meteoric rise is the fact that it’s done so without any kind of significant economic contraction. Nearly fifty years of consistently positive GDP growth is practically sorcery in the eyes of the west, as our more democratized and less managed economies seldom manage to go a single decade without at least some kind of bust, let alone five.

The assumed impossibility of eternally uninterrupted economic growth has raised more and more eyebrows and elicited more and more dire predictions about China’s economy as time has passed. Surely the ruling Chinese Communist Party can’t stave off the fundamental economic forces indefinitely. Surely the other shoe is going to drop soon, and all will be right with the world.

It has to. Right?

We’re supposed to be living in a post-Soviet world. A world where the question of managed versus free economies is long-settled fact. But if the CCP is able to keep China’s economy—an economy encompassing the interests of over a billion people—from experiencing so much as a recession, that settled fact starts to look more like an open question with each passing quarter.

The current situation facing China’s real estate market is the latest and perhaps most convincing sign that China has finally reached a tipping point. A generation’s worth of breakneck growth, urbanization, and unintended consequences may be coming to a head.

(Un)Real Estate

China’s housing market is currently the biggest asset class in the world, with a notional value of nearly $60 trillion, more than the entire capitalization of the stock market. About one third of China’s economic activity involves the real estate sector (compared to 15 to 18% of the American economy), a staggering figure that becomes even more so when combined with the fact that housing accounts for about 70% of Chinese household wealth.

The reasons for the outsized role that housing and real estate play in China’s economy are complex and numerous, though they all trace their roots back to the CCP.

The current real estate crisis began shortly after China relaxed its rules on private home sales back in 1998. This change in policy roughly coincided with the explosive economic growth that’s characterized much of the past decades, much of which relied on the importation of cheap labor from the Chinese countryside into rapidly growing metro areas. Over 480 million Chinese moved from the country to the city in pursuit of better economic opportunities, and real estate developers were only too happy to provide the accommodations that the newly urbanized Chinese both needed and could suddenly afford.

Real estate developers and construction firms weren’t the only ones to profit from the unprecedented mass urbanization. Regional governments—many of which relied heavily on land sales for revenue—encouraged as much development as possible, and the seemingly endless demand for housing gave yield-starved Chinese investors a place to park their capital. Developers soon found themselves unable to keep up with the pace of demand and began to take on massive amounts of debt, much of it in dollar-denominated offshore bonds, and even started selling properties in developments that hadn’t even begun construction.

China’s government took notice of all this rampant speculation and took what it saw as reasonable steps to mitigate the threat of the collapse of the real estate market. It imposed new financing restrictions for developers based on their liabilities, debt, and cash holdings, as well as imposed new rules for banks to limit the amount of mortgage lending. Some developers, including the giant China Evergrande Group, were pushed into default by these new restrictions and were forced to put ongoing projects on hold while they sorted out their balance sheets.

Quirks in China’s real estate system meant that the newly paused or canceled projects were more than just the developers’ problems. Chinese homebuyers who had gotten mortgages and purchased unbuilt properties suddenly found themselves on the hook for properties that may never be completed, and many were understandably upset. More and more people began to protest the situation by refusing to pay their mortgages until upwards of $295 billion worth of loans were affected before the CCP started interfering with data collection on the subject. So far China’s government has been unsuccessful in trying to get the situation under control, though they are stepping up support for distressed developers and providing some special loans to help ensure certain projects are completed.  

How Will China’s Housing Collapse Affect the World?

Planned demolition of unfinished building project in Kunming

The current crisis has severe implications for the wider China economy, some of which are already being felt. S&P Global Ratings has claimed that around 20% of the Chinese developers it rates are at risk of going under, and that falling land sales have impacted local governmental revenues to the point that 30% of local governments may have to cut spending by the end of the year. Nonperforming real estate loans held by state-owned banks increased by a full 1% in 2021, a figure that is sure to grow as more recent data is made available. There is every reason to believe that the real estate market will suffer in the short to medium-term.

Harvard professor Kenneth Rogoff estimates that a drop of 20% in real estate-related investments could cut 5 to 10% out of China’s GDP, and that the subsequent drops in real estate and construction employment could create significant instability in China’s job market. Or, more broadly: “On the medium term, China faces a multitude of challenges, ranging from extremely adverse demographics to slowing productivity…Until now, the housing boom has been sustained by a broad economic boom that now faces steep headwinds.”

The intentionally opaque workings of China’s government make it difficult to predict exactly how the current crisis will play out. It is, however, possible to extrapolate the kind of impact the crisis may have on the global economy if China’s real estate market continues to deteriorate. The first and most obvious consequence of a serious slowdown in China’s economy will be felt by companies with significant exposure to China. Firms like Wynn Resorts, Apple, Tesla, and Disney would all suffer from the ensuing loss of revenue from China’s market, as would firms like Qorvo, Boeing, Caterpillar, and any other firms that rely on supplies from or sales to China.

In terms of Chinese companies, the ratings agency Fitch identified three main sectors that would be most vulnerable to a slowdown in the real estate market: Asset management companies, engineering and construction firms, and steel producers. Fitch also believes that small and regional banks would be most vulnerable to continuing difficulties—particularly if the trend of homebuyers refusing to make mortgage payments on properties that may not ever be built continues—though this may have little impact on the global economy beyond the consequences of a slowdown in China’s economy at large.


As dire as things may seem, however, it is important to remember that China’s government is acutely aware of the risks its economy faces from the current crisis. Pundits, analysts, and observers alike have been warning about an imminent collapse in China for years now, yet the closest we’ve seen was a self-imposed downturn that resulted from the government’s draconian attempts to eradicate COVID-19 within their borders. There is little reason to assume that China’s government’s control over their economy has slipped to any significant degree. Anathema as it may seem to western sensibilities, China’s government still possesses the tools, the will, and the monopoly on violence it needs to prevent the real estate market from destroying their economy as a whole.

The best response, for now, is to maintain the course. It may be a good idea to close positions concerning firms with significant exposure to China’s economy, but treat all other investments the same way you would when facing any other kind of economic headwinds. If the economies of Europe and the United States made it through the 2008 housing crisis, chances are China’s economy will weather this storm as well.

The post China’s Housing Crisis: What Investors Need to Know appeared first on Wall Street Survivor.

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