China’s real estate trouble could spill into other major sectors, three sectors particular vulnerable – research
China’s real estate trouble could spill into other major sectors, three sectors particular vulnerable – research

China’s real estate trouble could spill into other major sectors, three sectors particular vulnerable – research

 

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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.

“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 said in a report.

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 and found that three business including asset management companies; non state-owned engineering and construction companies; and smaller steel companies are most vulnerable to real estate’s troubles.

Asset management companies “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.

Non state-owned Engineering, construction firms “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,” Fitch Rating said.

Many smaller steel producers “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.

Fitch believes the recent rise in the number of homebuyers refusing mortgage payments over stalled projects underlines the potential for China’s property crisis to deepen.

Official data show that China’s home sales declined by 32% in the first half of this year from a year earlier and industry research suggested that the country’s top 100 developers likely saw even worse performance — with sales down by 50%.

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.

“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, as diminishing confidence could stall the sector’s recovery, which will eventually ripple through the domestic economy,” the report said.

Large and central government-affiliated businesses were less vulnerable to a deterioration in real estate than smaller firms or those tied to local governments, the rating agency said.

Among banks, Fitch said small and regional banks — reflecting about 30% of banking system assets — face greater risks, but risks for Chinese banks overall could rise if authorities significantly relax requirements for lending to troubled real estate developers, the report said.

Businesses least vulnerable to real estate’s problems were insurers, food and beverage companies, power grid operators and national oil companies, the report said.