China’s real estate sector accounts for more than a quarter of the national GDP, according to Moody’s. Pictured is a residential complex under construction on December 15, 2021 in Guizhou Province.
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BEIJING – China’s real estate woes could spread to other major sectors if problems persist, with three particular companies most vulnerable, according to ratings agency Fitch.
Since last year, investors have been worried 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 problems for developers back to the fore, while China’s economic growth slows.
“If timely and effective policy intervention does not materialize, the distress in the real estate market will be prolonged and have effects on various sectors of China beyond the immediate real estate value chain,” Fitch analysts said on Monday in a report.
Under this stress scenario, Fitch analyzed the impact over the next 12 to 24 months on more than 30 types of companies and government entities. The company found three that are most vulnerable to real estate problems:
1. Asset management companies
These companies “place a considerable amount of assets backed by collateral related to real estate, making them highly exposed to prolonged problems in the real estate market,” the report said.
2. Engineering, construction companies (non-state)
“The sector in general is in difficulties from 2021. … They do not have competitive advantages in the exposure of infrastructure projects or in access to financing in relation to their [government-related] comrades,” the report said.
3. Small steel producers
“Many have been operating at a loss for several months and could face liquidity problems if China’s economy remains lackluster, especially given the sector’s high leverage,” the report said.
Fitch said construction accounts for 55% of steel demand in China.
The slowdown in the real estate sector has already dragged down 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 underscores the potential for China’s housing crisis to deepen…
Official data shows residential home sales fell 32% in the first half of this year from a year ago, Fitch said. The report cited industry research as indicating that the 100 largest developers likely saw even worse performance, with sales falling by 50%.
Impact on other sectors
While Fitch’s base case assumes China’s property sales will grow again next year, analysts warned that “deteriorating homebuyer confidence could slow the recovery momentum of the sales we saw in May and June.”
Since late June, many homebuyers have suspended mortgage payments to protest construction delays on apartments they had already paid for, putting future sales from developers and a major source of cash flow at risk. Developers in China often sell houses before they are finished.
“Fitch believes the recent increase in the number of homebuyers suspending mortgage payments on stalled projects underscores the potential for a deepening of China’s housing crisis, as declining confidence could slow the recovery of sector, which will ultimately affect the national economy,” the report said.
Analysis provided by Fitch generally found that large, central government-affiliated companies were less vulnerable to real estate impairment than smaller companies or those linked to local governments.
Among banks, Fitch said small and regional banks, which represent about 30% of the banking system’s assets, face greater risks. But the ratings agency noted that risks to Chinese banks in general could increase if authorities significantly relax lending requirements to troubled property developers.
Companies least vulnerable to real estate problems were insurers, food and beverage companies, power grid operators and national oil companies, the report said.
Housing prices in focus
Chinese property developers came under greater pressure about two years ago, when Beijing began cracking down on companies’ heavy reliance on debt for growth.
Figures such as vacancy rates give an idea of the magnitude of real estate problems.
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China’s residential property vacancy rate averaged 12 percent in 28 major cities, according to a report last week by the Beike Research Institute, a unit of Chinese property sales and rental giant Ke Holdings.
That’s second globally behind only Japan, and higher than the U.S. vacancy rate of 11.1 percent, the report said.
If there are strong expectations of falling house prices, these empty apartments could exacerbate the oversupplied market and the risk of further price falls, the report said.
Limited state support
This year, many local governments began to relax home purchase restrictions in an attempt to support the real estate sector.
But even with the latest mortgage protests, Beijing has yet to announce full-scale support.
“Even if the authorities intervene aggressively, there is a risk that new home buyers may not yet respond positively to this, particularly if house 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 that it would take a series of events, rather than a single one, to trigger the stress scenario laid out in the report.
Analysts said that if the weak market sentiment persists for the rest of the year, the analyzed industries could be adversely affected in the coming year.