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China's property troubles have pushed one debt indicator above levels seen in the financial crisis

Jan 7, 2023

Real estate investment dropped more in the first five months than it did in the first four. Fixed asset investment data from the first five months of 2022 shows. On May 16, a Huai'an City development was photographed in Jiangsu, east China.


BEIJING -- Due to the surge in downgrades made by Chinese property investors since late last, Moody's Ratings Agency said Wednesday that a measure of Asia's credit risk has outstripped its 2009 financial crises high.

Moody's covers a number of high-yield Asian companies, including those that are not considered to be risky. This includes the share that has received the highest speculative rating of "B3 positive" or lower, which nearly doubled last year. It reached a record of 30.5% in May.

This is higher than the 27.3% that was reached in May 2009 when there was a global financial crisis. Moody's reported that in May 2009, there were only three Chinese property developers who made up the risky share. In May 2022, it was 24.

It's not known if the new record signals a financial crisis.

High-yield bond are more risky than products classified as "investment grade." They offer higher returns but carry greater risk. "B3-negative" is the lowest rating of a category. It denotes assets considered "speculative and subject to high risk credit" in Moody's systems.

Spate of downgrades

As concerns grew over Chinese real estate developers' ability and repayment of debt, downgrades caused a new record in risky ratings.

Moody's has downgraded 91 high-yield Chinese property developer's in the last nine month.

It's a record pace of downgrades, according to the agency. This was despite only 56 downgrades issued to such companies in the ten years ended December 2020.

According to the report, some Chinese developers have had their bonds downgraded multiple times. Evergrande, Greenland and Agile Group are some of the names that appear on Moody's B3 negative (or lower) list. Kaisa, Kaisa, Logan, Kaisa, Kaisa, and RF. Evergrande was added to the list in August.

"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 have all observed that contract sales have been quite low, and we haven’t seen very significant rebound responding the supportive policies," she stated, noting that the effect would likely occur in the second-half of the year.

Financing problems

In recent months, the central Chinese government and the local authorities tried to support the real estate market by lowering mortgage rates and making it easier to purchase 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.

He stated that there remains some caution. He stated, "Years-to-date we see that the bank are lending more for MA purposes to the state owned enterprises." "That's something encouraged."

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Beijing demanded that the country's real estate market be stable and healthy at a Politburo meeting, which took place in April. It also called for support for local governments in improving their regional realty situation. Leaders stressed the importance of houses for people to live in and not for speculation.

However, Chinese property developers also have to deal with a challenging financing environment.

Moody's Wednesday report stated that companies rated B3N or lower have had historically difficulty issuing US dollars bonds in this market. "With credit conditions being tighter today, it has remained relatively closed to Asian high-yield issuesrs," Moody's said in Wednesday's report.

According to the agency, the agency reported that high-yield issuance fell 93% from a year earlier to $1.2 billion in the first five month of this year.

More defaults expected

China's large real estate industry has come under fire in recent years. Beijing is trying to curb developers' excessive reliance on loans for growth and a surge of house prices.

Evergrande is just one example of a number of developers who have issued billions in U.S. Dollar-denominated loans. Investors were worried that defaults might spread to China's other economy, which is the second-largest in world.

Evergrande defaulted in December. Many other Chinese real-estate developers also defaulted on or missed interest payments.

Moody's expects to see more China real estate developers defaulting this year, Moody's Chen said. She noted that the agency covers over 50 names in this industry. More than half of those have a negative outlook or are under review for downgrading.

According to Moody's, China's GDP is 28% due to real estate and related industries. Moody's lowered its 2022 GDP growth forecast for China to 4.5% on Tuesday. This was based on Covid-19's impact and geopolitical risk.

This week's data showed that the real estate market is still subdued.

China's National Bureau of Statistics announced Wednesday that real estate investment fell by 4% in the first five month of this year, despite an overall increase in fixed assets investment.

According to Goldman Sachs' analysis Thursday of official data, property prices in 70 Chinese cities were unchanged in May, 0.1% higher than a year ago.

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