Here’s where China’s real estate problems could spill over

BEIJING — China’s property woes could spill over into other major sectors if the problems persist — and three particular companies are the most vulnerable, according to ratings agency Fitch.

Since last year, investors have feared that the financial problems of Chinese property developers could spread to the rest of the economy. Over the past two months, the refusal of many homebuyers to pay their mortgages has brought developer problems back to the fore – while China’s economic growth slows.

“If timely and effective policy intervention does not materialize, the housing market distress will be prolonged and affect various sectors in China beyond the immediate property sector value chain,” Fitch analysts said on Monday. in a report.

In such a stressful scenario, Fitch analyzed the impact over the next 12 to 24 months on more than 30 types of businesses and government entities. The company has identified three that are most vulnerable to real estate issues:

1. Portfolio management companies

These companies “hold a significant amount of assets backed by real estate collateral, which makes them highly exposed to prolonged difficulties in the real estate market,” the report said.

2. Engineering and construction companies (non-state)

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

3. Small steel producers

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

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

The housing downturn has already dragged down broader economic indicators such as capital investment and the furniture sales component of retail sales.

Official data shows residential home sales fell 32% in the first half of this year compared to a year ago, Fitch pointed out. The report cites industry research as indicating that the top 100 developers likely performed even worse – with sales down 50%.

While Fitch’s base case assumes China property sales will return to growth next year, analysts warned that “deteriorating buyer confidence could dampen the recovery momentum in sales we have seen in May and June”.

Since late June, many buyers have suspended mortgage payments in protest at construction delays on apartments they had already paid for, jeopardizing future sales for developers and an important source of cash. Developers in China usually sell houses before they are finished.

“Fitch believes the recent increase in the number of homebuyers suspending mortgage payments for stalled projects underscores the potential for a worsening housing crisis in China, as loss of confidence could dampen the sector’s recovery, which will eventually affect the national economy,” the report said.

The analysis provided by Fitch generally found that large companies and companies affiliated with central government were less vulnerable to a deterioration in real estate than smaller companies or those linked to local governments.

Among banks, Fitch said smaller banks and regional banks — accounting for about 30% of banking system assets — face greater risks. But the rating agency noted that risks for Chinese banks overall could increase if authorities significantly ease lending requirements to struggling property developers.

The companies least vulnerable to real estate problems are insurers, agribusinesses, power grid operators and national oil companies, according to the report.

Chinese property developers came under increased pressure about two years ago when Beijing began cracking down on companies’ heavy reliance on debt for growth.

Figures like vacancy rates give an idea of ​​the extent of housing problems.

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

It is second in the world after Japan, and higher than the US vacancy rate of 11.1%, according to the report.

If there are strong expectations of falling house prices, those empty apartments could exacerbate the market’s oversupply – and the risk of deeper price falls, the report said.

This year, many local governments have started easing home buying restrictions in an effort 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 will still not respond positively to this, particularly if house prices continue to fall, and the overall economic outlook is clouded by the global economic malaise,” Fitch Ratings said in a statement to CNBC. .

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

Analysts said that if weak market sentiment persists for the rest of this year, the industries analyzed could be negatively affected over the next year.