What chain of real estate company woes mean for China
China’s real estate sector continues to suffer as two of the industry’s largest companies, Greenland Holdings and E-house, have had their credit ratings downgraded by S&P Global, a rating agency, according to Reuters.
This follows a third round of missed interest payments by the country’s second-largest real estate developer and one of the world’s most indebted companies, the Evergrande Group.
Some experts warn that an Evergrande collapse could soon be on the horizon, and that there could be two more companies, Fantasia and Modern Land. The credit rating of the first was recently downgraded in default or near default, and the latter has requested an extension because he is unable to pay his debts.
With some economists estimating that the real estate sector accounts for up to 28% of China’s GDP, the importance of industry in the country plays a more central role than in many other parts of the world.
Given the importance of the sector, Logan Wright, director of research on Chinese markets at Rhodium Group and deputy researcher at the Center for Strategic and International Studies, warned that the problem could be difficult for Beijing to compensate for, which means that the problem could go beyond its regulatory powers. .
“Contagion is already spreading in Chinese financial markets, as more developers face funding pressures,” Wright said. News week. “It is one thing to say the problem is controllable, it is quite another to control it. At some point, waiting too long to react to this market turmoil can become a political mistake.”
Wright said the stakes are high for Beijing. President Xi Jinping recently took steps to reduce the influence of Western-style capitalism in China and called on local governments to prepare for the fallout from an Evergrande collapse. However, as Beijing’s position became more apparent, the problems within the industry only intensified.
“Credit stress has been in the Chinese financial system for quite some time,” he said. News week. “But the recent focus on the problems in the real estate industry has amplified that pressure by reducing property sales nationwide, which likely adds financial stress to other developers and contributes to defaults.”
Whereas in the past, Beijing imposed restrictions on the number of formal loan developers who circumvented these regulations by borrowing from “shadow banks or informal institutions,” Wright said.
In early 2020, however, the country introduced a new system designed to limit lending and strengthen regulatory oversight, Wright wrote in a September 2020 report. He began grouping developers into different categories based on their ratios. debt, net debt (a measure of financial leverage) and their debt ratio. Most of the top 30 developers did not meet these three thresholds, which slowed their ability to grow by taking out additional loans.
Under these regulations, Wright predicted that credit dynamics would slow down and construction activity would decline. While Evergrande faces a number of unfinished projects, it has faced challenges in raising enough cash to pay its debts. Time will tell how China’s response can mitigate the magnitude of this problem.