Fixed asset investment data for the first 5 months of 2022 shows that investment in real estate has declined on a larger scale compared to the first 4 months of the year. Pictured here on May 16 is a development in the city of Huai’an in eastern China’s Jiangsu province.
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BEIJING – A measure of risk to debt in Asia has surpassed the peak of the 2009 financial crisis, thanks to a decline in the ranking of Chinese property developers since the end of the year. rating agency Moody’s said on Wednesday.
Among the Asian high-yielding companies outside of Japan that are included in the relatively risky category by Moody’s, the share with the most speculative ratings of “negative B3” or lower has nearly doubled year-on-year. last year – to a record high of 30.5% as of May. , the company said.
This is higher than the 27.3% market share achieved in May 2009, during the global financial crisis, the report said.
That year, only three Chinese property developers were part of that risk ratio, compared with 24 in May 2022, Moody’s said.
It is unclear whether the new record indicates an impending financial crisis.
High-yield bonds are inherently riskier than products considered “investment-class” and offer higher returns but greater risk. “B3 negative” is the lowest rating for the category of “speculative and high credit risk” assets in Moody’s system.
Many downgrades
Driving the new record-high risk rating is a series of Chinese property developers that have been downgraded as worries about their ability to repay loans grow.
Moody’s said it issued 91 downgrades to high-yield Chinese property developers in the past nine months.
That’s a record pace, the agency said, having only issued 56 downgrades to such companies in the 10 years ending December 2020.
The report notes that the bonds of some Chinese developers have received more than one downgrade. Names on Moody’s “B3 negative” or below list include Evergrande, Greenland, Agile Team, Sunac, Logan, Kaisa and R&F. Evergrande made the list in August, while some were only added in May.
“Our downgrade is a reflection of the current very difficult operating environment for Chinese property developers,” said Kelly Chen, vice president and senior analyst at Moody’s Investors Service. countries combined with a tight funding environment for all of them.”
“We’re all seeing pretty weak contract sales, and we haven’t seen a substantial rebound in response to accommodative policies,” she said, noting that the impact could will see in the second half of this year.
Financial challenges
China’s central and local governments have been trying to support the property market over the past few months by cutting mortgage rates and making it easier for people to buy apartments in different cities. .
“As for developer funding, I think the market knows that since the second half of last year, commercial banks have been fundamentally cautious towards this sector, especially the private sector. [non-state-owned] Hans Fan, deputy head of China and Hong Kong studies at CLSA, said in a phone interview last week.
Some caution remains, he said. “From the beginning of the year to now, what we have seen is that banks are lending more to SOEs for mergers and acquisitions purposes,” he said. “It is something that is encouraged.”
At the highest-level meeting of the Politburo at the end of April, Beijing called for promoting a stable and healthy real estate market, and called for support for local governments in improving real estate conditions. real estate in the area. Leaders emphasized, home is for living, not for speculation.
However, Chinese property developers also face a difficult financial environment abroad.
“Companies rated B3N and below have historically faced challenges in issuing in the US dollar bond market,” Moody’s said in a report Wednesday. “With tighter credit conditions now, the US dollar bond market is also relatively closed to Asian high-yield issuers.”
As a result, the agency said high-yield issues fell 93% in the first five months of the year from a year ago to $1.2 billion.
Expected to have more defaults
China’s huge property sector has come under pressure over the past two years as Beijing seeks to curb developers’ heavy reliance on debt for growth and soaring house prices.
Many developers, especially Evergrande, have released billions of dollars in debt. Investors fear defaults will spill over into the rest of China’s economy, the world’s second-largest.
Evergrande defaulted in December. Several other Chinese property developers have also defaulted or defaulted on interest payments.
Moody’s is expected to see more Chinese property developers default this year, Moody’s Chen said. She said the agency includes more than 50 names in the industry, and more than half have a negative view or are being considered for downgrade.
The company estimates that real estate and related sectors account for 28% of China’s gross domestic product. On Tuesday, Moody’s cut China’s 2022 GDP growth forecast from 5.2% to 4.5%, based on the impact of Covid-19, the property market downturn and geopolitical risks. treat.
Data released this week shows that the real estate market continues to be quiet.
Real estate investment in the first five months of this year fell 4% year-on-year, despite overall growth in fixed asset investment, China’s National Bureau of Statistics said on Wednesday.
Property prices in China’s 70 cities still fell in May, up 0.1% from a year ago, according to a Goldman Sachs analysis of official data released on Thursday.
