Credit: China real estate credit woes deepen

Hopeful of more support for China developers
Group Research, Chang Wei Liang12 Aug 2022
    Photo credit: Unsplash Photo

    The recent outbreak of mortgage boycotts in China has unsurprisingly chilled homebuyers’ sentiment in July. China’s top 100 developers reported that sales have fallen 28.6% (m/m) in July, dashing recovery hopes that emerged with a rebound in June post-lockdown. Chinese real estate USD credit suffers a crushing third blow, with selloffs broadening to even well-rated investment grade credit of developers widely regarded as “too big to fail”. Our China real estate DACS index, which is more tilted toward IG credit, has in turn surged to a record high of 506bps this week, surpassing its previous peaks in Oct 2021 and Mar 2022.

    Despite mortgages being the focus of attention, our China financials DACS index has only seen a small widening since June. This is largely because major Chinese banks are entering this boycott crisis with very high capital buffers. We expect the potential hit to capital ratios from non-performing mortgages to be manageable at around 40-80bps, so capital adequacy ratios are still set to remain high and close to pre-pandemic levels. The absence of financial contagion may be one reason why Chinese policymakers have been hesitant in announcing any direct intervention, opting instead for moral suasion of banks to increase lending to developers.

    We remain hopeful that policymakers will eventually step up to address risks stemming from project delivery, which is the key factor driving mortgage boycotts, holding back property sales, and creating uncertainty for even the largest, better-rated developers. That said, we are also cognisant that policy priorities have shifted, with property driven growth de-emphasized relative to technology and industrial driven growth. Any government support could therefore be more tentative and calibrated, instead of a forceful reining in of property sector risks.

    Chang Wei Liang

    FX & Credit Strategist, Global
    [email protected]

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