This is where China’s real estate problems could spread

According to Moody’s, China’s real estate industry 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.

Cost Photo | Future Publishing | Getty Images

BEIJING — China’s real estate woes could spread to other key sectors if problems persist — and three specific companies are most vulnerable, according to ratings agency Fitch.

Since last year, investors have feared that the financial woes 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 facing developers back to the fore – while China’s economic growth has slowed.

“In the absence of timely and effective policy intervention, the real estate market hardship will persist, impacting various sectors in China beyond the immediate real estate value chain,” analysts at Fitch said in a report on Monday.

Under such a stress scenario, Fitch analyzed the impact over the next 12 to 24 months on more than 30 types of companies and government bodies. The firm found three most vulnerable to real estate problems:

1. Asset management companies

These firms “hold a significant amount of assets backed by real estate-related collateral, leaving them highly exposed to ongoing real estate market distress,” the report said.

2. Engineering offices, construction companies (non-governmental)

“The sector in general has been in trouble since 2021. … They have no competitive advantages in terms of exposure to infrastructure projects or access to finance compared to them [government-related] Colleagues,” says the report.

3. Smaller 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 level of debt,” the report said.

According to Fitch, construction accounts for 55% of steel demand in China.

The slowdown in the housing market has already dragged down broader economic indicators such as fixed asset investment and the furniture sales component of retail sales.

Fitch believes the recent spike in homebuyers suspending mortgage payments due to deadlocked projects underscores the potential for a worsening of China’s housing crisis…

Official data shows that residential home sales fell 32% year-on-year in the first half of this year, Fitch pointed out. The report cites industry research that suggests the top 100 developers likely performed even worse — with a 50% drop in revenue.

Impact on other industries

While Fitch’s baseline scenario sees China’s home sales growing again next year, analysts warned that “deteriorating homebuyer confidence could stall the sales recovery momentum we saw in May and June.”

Since late June, many homebuyers have suspended mortgage payments to protest construction delays on homes they had already paid for, threatening future sales by developers and a key source of cash flow. Developers in China usually sell houses before completing them.

“Fitch believes the recent rise in the number of homebuyers who are suspending mortgage payments due to project stalls underscores the potential for the housing crisis in China to deepen, as falling confidence could stall the sector’s recovery, which will eventually impact the domestic economy “, says the report.

In general, the analysis provided by Fitch found that large and central government-linked companies are less vulnerable to property deterioration than smaller companies or those linked to local governments.

Among banks, Fitch said small and regional banks — which account for about 30% of the banking system’s assets — face greater risks. However, the rating agency noted that overall risks for Chinese banks could increase if authorities significantly relax lending requirements to troubled real estate developers.

The least vulnerable to real estate woes are insurers, food and beverage companies, power grid operators and national oil companies, the report said.

House prices in focus

Chinese real estate developers came under increasing pressure about two years ago when Beijing began to crack down on companies’ heavy reliance on debt for growth.

Figures such as vacancies give an idea of ​​how big the real estate problems are.

Read more about China from CNBC Pro

Residential vacancy rates in China averaged 12% in 28 major cities, according to a report by Beike Research Institute, a unit of Chinese property sales and rentals giant Ke Holdings.

That’s the second highest in the world, only after Japan, and higher than the US vacancy rate of 11.1%, the report said.

If there are strong expectations of falling home prices, those empty homes could exacerbate the oversupply in the market — and the risk of larger price declines, the report says.

Limited government support

This year, many local governments have begun easing restrictions on homebuying to prop up the real estate sector.

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

“Even if the authorities intervene aggressively, there is a risk that new homebuyers will not respond positively, particularly if house prices continue to fall and the macroeconomic outlook is clouded by the global economic crisis,” Fitch Ratings said in a statement to CNBC.

Fitch stressed that it would take a series of events, not just one, to trigger the stress scenario outlined in the report.

The analysts said that if weak market sentiment persists for the rest of this year, the analyzed sectors could be negatively impacted into next year. This is where China’s real estate problems could spread

Joshua Buckhalter

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