China’s real estate troubles may spread here

According to Moody’s, China’s real estate industry accounts for more than a quarter of the country’s GDP. Pictured here is an apartment complex under construction on December 15, 2021 in Guizhou.

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BEIJING — China’s real estate crisis could spill over into other major sectors if the problem persists, with three particular companies being the most vulnerable, according to rating agency Fitch.

Since last year, investors have worried that the financial troubles of Chinese property developers could spill over into the economy. Over the past two months, the problem of developers has resurfaced as many homebuyers refused to pay their mortgages, while China’s economic growth has slowed.

“Without timely and effective policy interventions, the property market recession will be prolonged, impacting various sectors in China beyond the property sector’s immediate value chain,” Fitch analysts said. would,’ he said.

Under these stress scenarios, Fitch analyzed the impact on more than 30 companies and government agencies over the next 12-24 months. The company found the three most vulnerable to real estate problems.

1. Asset management company

These companies “have substantial assets backed by real estate-related collateral and are highly exposed to prolonged real estate market downturns,” the report said.

2. Engineering and construction companies (non-state owned)

“The sector is generally in trouble from 2021 onwards…they do not have a competitive advantage in terms of infrastructure project exposure or financing. [government-related] comrades,” the report said.

3. Small steel producers

“Many companies have been operating at a loss for months and could face liquidity problems if the Chinese economy remains lackluster, especially given the sector’s high leverage,” the report said. pointed out.

Fitch said construction accounts for 55% of China’s steel demand.

The real estate slowdown has already dragged down broader economic indicators, including fixed asset investment and retail sales furniture sales.

Fitch believes the recent rise in homebuyers stopping mortgage payments underscores the potential for a deepening China property crisis…

Official data showed home sales fell 32% year-on-year in the first half of the year, Fitch said. The report, citing industry research, shows that the 100 largest developers have fared even worse, with sales likely dropping by 50% from his.

Impact on other sectors

Fitch’s base case is that China’s property sales will turn positive next year, but analysts said that “declining homebuyer confidence has stalled the sales recovery seen in May and June. It may,” he warned.

Since late June, many homebuyers have suspended mortgage payments and protested delays in building apartments they’ve already paid for, jeopardizing future sales and an important source of cash flow for developers. is at risk. Chinese developers typically sell their homes before they are finished.

“The recent rise in the number of homebuyers suspending mortgage payments due to stalled projects underscores the potential for a deepening China’s real estate crisis,” Fitch said.

Analysis provided by Fitch found that large and centrally owned companies were generally less affected by property deterioration than smaller and local government companies.

Among banks, Fitch said smaller and regional banks, which represent about 30% of banking system assets, face greater risks. But the ratings agencies said China’s banks as a whole could be at greater risk if authorities significantly eased lending requirements to troubled property developers.

Companies least affected by property problems are insurance companies, food and beverage companies, power grid operators and national oil companies, the report said.

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Chinese property developers came under pressure about two years ago when they started cracking down on companies that rely heavily on debt for growth.

Figures such as vacancy rates show how big the real estate problem is.

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China’s residential property vacancy rate averaged 12% in 28 major cities, according to a report last week from Beike Research Institute, a division of Chinese real estate sales and rental giant Ke Holdings.

This is the second highest in the world after Japan and higher than the 11.1% vacancy rate in the United States, the report said.

Vacant apartments could exacerbate the market oversupply if house price declines are strongly expected, increasing the risk of further price declines, the report said.

Limited state support

This year, many local governments began easing restrictions on home purchases to support the real estate sector.

But despite recent mortgage protests, Beijing has yet to announce a large-scale aid.

In a statement to CNBC, Fitch Ratings said, “Even with aggressive intervention by the authorities, new homebuyers will likely continue to lose interest, especially if home prices continue to fall and the overall economic outlook is clouded by a slowdown in the global economy. There is a risk that people will not react positively to this.” .

Fitch stressed that it would take a series of events, not just one, to drive the stress scenarios presented in the report.

Analysts said the industries analyzed could be adversely affected into next year if weak market sentiment continues for the rest of the year.

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