According to Moody’s, China’s real estate industry accounts for more than a quarter of the country’s GDP. Pictured is a residential complex under construction on December 15, 2021, in Guizhou province.
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BEIJING – China’s real estate troubles could spill over into other key sectors if problems persist – and three businesses in particular are most vulnerable, according to ratings agency Fitch.
Since last year, investors have been worried that the financial problems of Chinese property developers could spread to the rest of the economy. In the past two months, Many homebuyers refusing to pay their mortgages have brought developers’ problems to the fore once again. – while China’s economic growth slows.
“If timely and effective policy interventions fail to materialize, the predicament in the real estate market will persist and affect various sectors in the country,” said Fitch analysts. China is beyond the immediate value chain of the real estate sector,” Fitch analysts said in a report Monday.
Against such a backdrop of stress, Fitch analyzed the impact over the next 12 to 24 months on more than 30 types of businesses and government entities. The company discovered three factors most vulnerable to real estate troubles:
1. Asset management company
These companies “hold large amounts of assets backed by real-estate-related collateral, leaving them exposed to a prolonged real estate market predicament,” the report said. said.
2. Mechanical and construction companies (not state-owned)
“The industry as a whole has been struggling since 2021. … They have no competitive advantage in accessing infrastructure projects or accessing capital compared to [government-related] the report said.
3. Smaller steel producers
“Many companies have been operating at a loss for several months and could face liquidity problems if the Chinese economy remains weak, especially given the high leverage ratio in the sector,” the report said. this”.
Fitch said construction accounts for 55% of steel demand in China.
The downturn in the real estate sector has dragged on broader economic indicators such as fixed asset investment and the furniture sales component of retail sales.
Fitch believes the recent increase in the number of homebuyers suspending mortgage payments on stalled projects suggests the possibility that China’s property crisis will deepen…
Official data shows residential home sales fell 32% in the first half of this year from a year ago, Fitch pointed out. The report cites industry research indicating that the 100 largest developers could see even worse performance – with a 50% drop in sales.
Influencing other areas
While Fitch’s base case assumes that China’s property sales will pick up again next year, analysts warn that “a decline in homebuyer confidence could hinder sales rebound that we’ve seen in May and June.”
Since late June, many homebuyers have paused mortgage payments to protest construction delays on the apartments they’ve paid for, bringing Developers’ future sales and an important source of cash flow at risk. Developers in China often sell homes before completing them.
“Fitch believes the recent increase in the number of homebuyers suspending mortgage payments due to stalled projects shows the risk of China’s property crisis deepening, as confidence declines. could hamper the industry’s recovery, which will ultimately affect the domestic economy,” the report said.
The analysis provided by Fitch generally shows that large and central government businesses are less affected by real estate downturns than smaller businesses or those tied to the government. local.
Among banks, Fitch said small and regional banks – which represent about 30% of banking system assets – face greater risk. But the rating agency noted that risks to Chinese banks in general could increase if authorities significantly relax lending requirements for struggling property developers. .
The report says the businesses least vulnerable to real estate problems are insurance companies, food and beverage companies, power grid operators and national oil and gas companies.
Concentrated house prices
Chinese property developers came under increasing pressure about two years ago when Beijing began cracking down on companies’ heavy reliance on debt for growth.
Numbers like vacancy rates show the magnitude of real estate problems.
According to a report last week by the Beike Research Institute, a Chinese property sales and rental giant Ke Holdings, the property vacancy rate in China is 12% on average across 28 major cities.
The report says this is second globally only to Japan and higher than the US vacancy rate of 11.1%.
If there are high expectations of falling home prices, those vacant units could exacerbate an oversupply in the market – and a greater risk of falling prices, the report said.
Limited state support
This year, many local governments began easing home-buying restrictions in an effort to boost 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 homebuyers will not respond positively to this, especially if home prices continue to fall and the overall economic outlook is clouded by global economic turmoil,” Fitch Ratings said in a statement to CNBC.
Fitch stressed it would take a series of events, rather than just one, to produce the stressful scenario outlined in the report.
Analysts say that if weak market sentiment persists for the rest of this year, the sectors analyzed could be negatively affected next year.
