China’s real estate problems have pushed the debt indicator to an all-time high

Fixed asset investment data for the first five months of 2022 showed that real estate investment declined on a larger scale than in the first four months of the year. Pictured on May 16 is a development in the city of Huai’an in east China’s Jiangsu province.

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BEIJING — A measure of debt risk levels in Asia has surpassed its 2009 financial crisis peak, helped by an increase in downgrades by Chinese property developers since late last year, the agency said on Wednesday. Moody’s rating.

Among the relatively risky category of high-yield Asian companies outside of Japan that are covered by Moody’s, the share with the most speculative ratings of “B3 negative” or lower nearly doubled from a year ago – to a record 30.5% in May. , says the firm.

This is more than the 27.3% share reached in May 2009, during the global financial crisis, according to the report.
That year, only three Chinese property developers were in that at-risk share, down from 24 in May 2022, Moody’s said.

It is unclear whether the new record indicates that a financial crisis is imminent.

High yield bonds are already riskier than so-called investment grade products and offer a higher return but higher risk. “B3 negative” is the lowest rating for a category that designates assets “speculative and subject to high credit risk” in the Moody’s system.

Series of downgrades

Driving the new risky ratings record was a series of downgrades on Chinese property developers as worries grew over their ability to repay debt.

Moody’s said it issued 91 downgrades for high-yielding Chinese property developers in the past nine months.

That’s a record pace, the agency said, considering it issued just 56 downgrades for such companies in the 10 years ending December 2020.

Some Chinese developer bonds received more than one downgrade, the report noted. Names on Moody’s “B3 negative” or lower list include Evergrande, Greenland, Agile Group, Sunac, Logan, Kaisa and R&F. Evergrande entered the roster in August, while several weren’t added until May.

“Our downgrade reflects the current very challenging operating environment for Chinese property developers, combined with a tight funding environment for each of them,” said Kelly Chen, vice president and principal analyst at Moody’s Investors Service, during the briefing. a telephone interview on Thursday.

“We all saw that contract sales were quite weak, and we didn’t see a very significant rebound in response to supportive policies,” she said, noting that the effect would likely be visible in the second half of the year. .

Funding challenges

China’s central government and local authorities have tried to support the real estate market in recent months by cutting mortgage rates and making it easier to buy apartments in different cities.

“For developer funding, I think the market knows that since the second half of last year, commercial banks have basically been cautious on the sector, especially the private sector. [non-state-owned] ones,” Hans Fan, deputy director of China and Hong Kong research at CLSA, said in a phone interview last week.

Some caution remains, he said. “So far this year, what we’ve seen is that banks are lending more to public companies for mergers and acquisitions,” he said. “It’s something encouraged.”

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At a high-level government Politburo meeting in late April, Beijing called for promoting a stable and healthy real estate market and urged local governments to support improving regional real estate conditions. The leaders stressed that the houses are made for living in and not for speculation.

However, Chinese property developers also face a difficult overseas financing environment.

“Companies rated B3N and lower have historically faced challenges issuing in the US dollar bond market,” Moody’s said in its report on Wednesday. “With tighter credit conditions today, the US dollar bond market also remained relatively closed to high-yield Asian issuers.”

As a result, the agency said rated high-yield issues plunged 93% in the first five months of the year from a year ago to $1.2 billion.

More flaws expected

China’s massive real estate sector has come under pressure over the past two years as Beijing seeks to reduce developers’ heavy reliance on debt for growth and soaring property prices.

Many developers, including Evergrande, have issued billions of dollars of US dollar-denominated debt. Investors feared the defaults would ripple through the rest of China’s economy, the world’s second-largest.

Evergrande defaulted in December. Several other Chinese property developers have also defaulted or missed interest payments.

Moody’s expects to see more Chinese property developers default this year, Moody’s Chen said. She said the agency covers more than 50 names in the industry, and more than half have a negative outlook or are being reviewed for downgrading.

The company estimates that real estate and related sectors account for 28% of China’s gross domestic product. On Tuesday, Moody’s lowered its forecast for China’s GDP growth for 2022 to 4.5% from 5.2%, based on the impact of Covid-19, the housing market slowdown and geopolitical risks.

Data released this week showed that the real estate market remains sluggish.

Real estate investment in the first five months of this year fell 4% from the same period a year ago, despite overall growth in investment in fixed assets, the National Bureau of Statistics said on Wednesday. from China.

Home prices in 70 Chinese cities remained subdued in May, up 0.1% from a year ago, according to Goldman Sachs analysis of official data released Thursday.

China’s real estate problems have pushed the debt indicator to an all-time high

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