China real estate troubles sent debt indicator to record high

China real estate troubles sent debt indicator to record high

BEIJING — A measure of danger ranges for debt in Asia has surpassed its 2009 monetary disaster high, thanks to a surge in downgrades of Chinese language property builders since late final 12 months, rankings company Moody’s stated Wednesday.

Among the many comparatively dangerous class of Asian high-yield corporations outdoors Japan which are coated by Moody’s, the share with probably the most speculative rankings of “B3 negative” or decrease has almost doubled from final 12 months — to a record high of 30.5% as of Might, the agency stated.

That is greater than the 27.3% share reached in Might 2009, in the course of the international monetary disaster, the report stated.
That 12 months, solely three Chinese language property builders have been a part of that dangerous share, versus 24 in Might 2022, Moody’s stated.

It is not clear whether or not the brand new record signifies a monetary disaster is imminent.

High-yield bonds are already riskier than merchandise deemed “investment grade,” and provide greater return however larger danger. “B3 negative” is the bottom score for a class that denotes belongings which are “speculative and are subject to high credit risk” in Moody’s system.

Spate of downgrades

Driving the brand new record high in dangerous rankings was a spate of downgrades on Chinese language real estate builders as worries grew over their potential to repay debt.

Moody’s stated it issued 91 downgrades for high-yield Chinese language property builders within the final 9 months.

That is a record tempo, the company stated, contemplating it issued solely 56 downgrades for such corporations within the 10 years ending December 2020.

Some Chinese language builders’ bonds have acquired a couple of downgrade, the report famous. Names on the Moody’s “B3 negative” or decrease record embrace Evergrande, Greenland, Agile Group, Sunac, Logan, Kaisa and R&F. Evergrande entered the list in August, while several were added only in May.

“Our downgrade is a reflection of the current very tough operating environment for China property developers combined with a tight funding environment for all of them,” Kelly Chen, vice president and senior analyst at Moody’s Investors Service, said in a phone interview Thursday.

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

Financing challenges

The central Chinese government and local authorities have tried to support the property market in the last several months by cutting mortgage rates and making it easier for people to buy apartments in different cities.

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

Some cautiousness remains, he said. “Year-to-date what we see is that the banks are lending more to the state-owned enterprises for M&A purposes,” he said. “That’s something encouraged.”

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At a top-level government Politburo 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 emphasized that houses are for living in, not for speculation.

However, Chinese real estate developers also face a tough financing environment overseas.

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

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

More defaults expected

China’s massive real estate sector has come under pressure in the last two years as Beijing seeks to curb developers’ high reliance on debt for growth and a surge in house prices.

Many developers, notably Evergrande, have issued billions of dollars’ worth in U.S. dollar-denominated debt. Investors worried defaults would spill over to the rest of China’s economy, the second-largest in the world.

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

Moody’s expects to see more China real estate developers defaulting 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 on review for downgrade.

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

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

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

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

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