Here’s where China’s real estate troubles could spill over
China’s real estate industry accounts for more than a quarter of national GDP, according to Moody’s. Pictured here is a residential complex under construction on Dec. 15, 2021, in Guizhou province.
Costfoto | Future Publishing | Getty Images
BEIJING — China’s real estate troubles could spill into other major sectors if the problems persist — and three particular businesses are most vulnerable, according to ratings agency Fitch.
Since last year, investors have worried that Chinese property developers’ financial problems could spread to the rest of the economy. In the last two months, many homebuyers’ refusal to pay their mortgages have brought developers’ problems to the forefront again — while China’s economic growth slows.
“If timely and effective policy intervention does not materialise, distress in the property market will be prolonged and have effects on various sectors in China beyond the property sector’s immediate value chain,” Fitch analysts said in a report Monday.
Under such a stress scenario, Fitch analyzed the impact over the next 12 to 24 months on more than 30 kinds of businesses and government entities. The firm found three that are most vulnerable to real estate’s troubles:
1. Asset management companies
These firms “hold a sizeable amount of assets that are backed by real estate-related collateral, making them highly exposed to prolonged property-market distress,” the report said.
2. Engineering, construction firms (non state-owned)
“The sector in general has been in difficulty since 2021. … They do not have competitive advantages in infrastructure project exposure or funding access relative to their [government-related] peers,” the report said.
3. Smaller steel producers
“Many have been operating at a loss for a few months and could face liquidity issues if China’s economy remains lacklustre, especially given the high leverage in the sector,” the report said.
Fitch said construction accounts for 55% of steel demand in China.
The slowdown in real estate has already dragged down broader economic indicators like fixed asset investment and the furniture sales component of retail sales.
Fitch believes the recent rise in the number of homebuyers suspending mortgage payments over stalled projects underlines the potential for China’s property crisis to deepen…
Official data show residential housing sales fell by 32% in the first half of this year from a year ago, Fitch pointed out. The report cited industry research as indicating the 100 largest developers likely saw even worse performance — with sales down by 50%.
Impact on other sectors
While Fitch’s base case assumes China’s property sales will return to growth next year, the analysts warned that “deterioration in homebuyers’ 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 for apartments they’d already paid for, putting developers’ future sales and an important…
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