Here the real estate problems in China can spill over

According to Moody’s, China’s real estate sector accounts for more than a quarter of the national GDP. Pictured here is a residential complex under construction on December 15, 2021 in Guizhou Province.

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BEIJING — China’s real estate problems could spill over into other major sectors if the problems persist — and three specific companies are the most vulnerable, according to rating agency Fitch.

Since last year, investors have been concerned that the financial problems of Chinese real estate developers could spread to the rest of the economy. In the past two months, the refusal of many homebuyers to pay their mortgages has brought developers’ problems back to the forefront as China’s economic growth slows.

“If timely and effective policy intervention is not forthcoming, real estate market turmoil will continue and affect several sectors in China outside of the direct real estate value chain,” Fitch analysts said in a report Monday.

In one such stress scenario, Fitch analyzed the impact over the next 12 to 24 months on more than 30 types of businesses and government agencies. The company found three most vulnerable to real estate issues:

1. Asset Management Companies

These companies “hold a significant amount of assets backed by real estate-related collateral, leaving them highly exposed to long-term problems in the real estate market,” the report said.

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

“The sector in general has been in trouble since 2021. … They have no competitive advantage in exposure to infrastructure projects or access to finance compared to their [government-related] colleagues,” the report said.

3. Smaller Steel Producers

“Many have been operating at a loss for a few months and could face liquidity problems if the Chinese economy remains weak, especially given the high leverage in the sector,” the report said.

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

The slowdown in real estate has already dragged broader economic indicators, such as fixed investment and the furniture sales component of the retail trade, downwards.

Fitch believes the recent surge in homebuyers suspending mortgage payments for stalled projects highlights the potential for China’s real estate crisis to worsen…

Official data shows that home sales fell 32% in the first half of this year from a year ago, Fitch noted. The report cited industry research indicating that the top 100 developers likely saw even worse performance — with a 50% drop in revenue.

Impact on other sectors

While Fitch assumes in his base case that real estate sales in China will grow again next year, the analysts warned that “deterioration in homebuyer confidence could slow the momentum of the sales recovery we saw in May and June”.

Since late June, many homebuyers have suspended mortgage payments to protest delays in building apartments they had already paid for, jeopardizing future developer sales and a major source of cash flow. Developers in China usually sell houses before they are finished.

“Fitch believes the recent surge in homebuyers suspending mortgage payments for stalled projects underscores that China’s real estate crisis may deepen as waning confidence could slow the sector’s recovery, eventually ripping through the domestic economy.” , the report said.

Overall, Fitch’s analysis found that large and central government-affiliated companies were less vulnerable to property deterioration than smaller or local government-affiliated companies.

Of the banks, Fitch said small and regional banks — which represent about 30% of the banking system’s assets — are at greater risk. But the rating agency noted that risks to Chinese banks in general could increase if authorities significantly ease lending requirements to troubled real estate developers.

Companies least vulnerable to real estate problems were insurers, food and beverage companies, power grid operators and national oil companies, the report said.

House prices in pictures

Chinese real estate developers came under increased pressure about two years ago as Beijing began cracking down on the companies’ high reliance on debt for growth.

Figures such as vacancy give an idea of ​​how big the real estate problem is.

Read more about China from CNBC Pro

Home vacancy rates in China averaged 12% in 28 major cities, according to a report last week by Beike Research Institute, a unit of Chinese real estate sales and rental giant Ke Holdings.

That’s second only to Japan globally, and higher than the US vacancy rate of 11.1%, the report said.

If there are strong expectations of falling home prices, those vacant apartments could exacerbate market oversupply — and the risk of bigger price drops, the report said.

Limited state aid

This year, many local governments have begun easing restrictions on home buying in an effort to support the real estate sector.

But even with the latest mortgage protests, Beijing has yet to announce large-scale support.

“Even if authorities intervene aggressively, there is a risk that new home buyers will still not react positively to this, especially if house prices continue to fall and the general economic outlook is clouded by the global economic slump,” Fitch Ratings said in a statement. CNBC. .

Fitch stressed that it would take a series of events, rather than just one, to trigger the stress scenario outlined in the report.

Analysts said that if weak market sentiment continues through the rest of this year, the sectors analyzed could be negatively impacted into next year.

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