China’s real estate troubles have pushed a debt indicator above financial crisis levels

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

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BEIJING — A measure of debt risk levels in Asia has surpassed the peak of the 2009 financial crisis, thanks to a spate of downgrades by Chinese real estate developers since late last year, rating agency Moody’s said Wednesday.

Of the relatively risky category of Asian high-yield companies outside Japan backed by Moody’s, the stock with the most speculative rating of “B3 negative” or lower has nearly doubled from last year – reaching a record high of 30.5% in May the company said.

That’s higher than the 27.3% share reached in May 2009 during the global financial crisis, the report said.
That year, only three Chinese property developers were part of that risky stock, by May 24, 2022, Moody’s said.

It is not clear whether the new record indicates that a financial crisis is imminent.

High yield bonds are already riskier than investment grade products, offering higher returns but greater risk. “B3 negative” is the lowest rating for a category that identifies assets that are “speculative and subject to high credit risk” in Moody’s system.

wave of downgrades

The new record high in risky ratings was sparked by a wave of write-downs from Chinese real estate developers as concerns about their ability to service debt mounted.

Moody’s said it has issued 91 downgrades to Chinese high-yield real estate developers in the past nine months.

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

Some Chinese developers’ bonds have suffered more than one downgrade, the report said. Names on Moody’s “B3 negative” or lower list include Evergrande, Greenland, Agile Group, Sunac, Logan, Kaisa and R&F. Evergrande entered the list in August, with several added only in May.

“Our downgrade is a reflection of the current very difficult work environment for Chinese real estate developers coupled with a tight financing environment for all of them,” Kelly Chen, vice president and senior analyst at Moody’s Investors Service, said in a telephone interview Thursday.

“We’ve all seen contracted sales have been quite weak, and we haven’t seen a very significant recovery in response to the supportive policies,” she said, noting that the effect is likely to be seen in the second half of the year.

Financing Challenges

The central Chinese government and local authorities have been trying in recent months to support the real estate market by cutting mortgage rates and making it easier for people to buy apartments in different cities.

“As far as developer financing is concerned, I think the market knows that commercial banks have been fundamentally reticent on the sector, especially private sector, since the second half of last year. [non-state-owned] Hans Fan, deputy head of China and Hong Kong Research at CLSA, said in a telephone interview last week.

Some caution remains, he said. “Year-to-date what we’re seeing is that the banks are lending more to state-owned companies for mergers and acquisitions,” he said. “That’s something that’s encouraged.”

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At a top Politburo government meeting in late April, Beijing called for the promotion of a stable and healthy real estate market and urged support for local governments in improving regional real estate conditions. Leaders stressed that houses are for living, not for speculation.

However, Chinese real estate developers also face a difficult financing environment abroad.

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

As a result, the agency said high-yield bond issuance fell 93% in the first five months of the year by 93% from a year ago to $1.2 billion.

More defaults expected

China’s huge real estate sector has come under pressure in the past two years as Beijing tries to curb developers’ heavy reliance on debt for growth and a rise in house prices.

Many developers, especially Evergrande, have spent billions of dollars worth of debt in US dollars. Investors feared that defaults would spill over into the rest of the Chinese economy, the world’s second largest.

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

Moody’s expects more Chinese real estate developers to 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 assessed for a downgrade.

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

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

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

Property 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.



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