China’s real estate problems have pushed the debt index to a record high

Fixed asset investment data for the first five months of 2022 showed a decline in real estate investment on a larger scale than during the first four months of the year. Pictured here on May 16th, a development in Huai’an City, east China’s Jiangsu Province.

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Rating agency Moody’s said on Wednesday that a measure of risk levels for debt in Asia has outstripped its soaring 2009 financial crisis, thanks to further cutbacks by Chinese property developers since late last year.

Among the relatively risky category of high-yield Asian companies outside of Japan that Moody’s covers, the share with speculative ratings of “B3 negative” or lower has doubled from last year — to a record 30.5% as of May. , the company said.

The report stated that this is higher than the 27.3% reached in May 2009, during the global financial crisis.
That year, Moody’s said, only three Chinese real estate developers were part of that stake, versus 24 in May 2022.

It is not clear whether the new record indicates that a financial crisis is imminent.

High-yield bonds are actually riskier than “investment grade” products, offering a higher return but greater risk. “B3 negative” is the lowest rating for a category indicating “speculative and high credit risk” assets in Moody’s system.

wave of cuts

A new record rise in risky ratings has led to a series of cuts to Chinese property developers as concerns grow about their ability to repay debt.

Moody’s said it issued 91 cuts to high-return Chinese property developers in the past nine months.

This is a record pace, the agency said, considering that it issued only 56 cuts to such companies in the 10 years ending in December 2020.

The report noted that some Chinese developers’ bonds received more than one writedown. Names on the “Negative List B3” or lower include Moody’s EvergrandeAnd the green landAnd the Agile groupAnd the Snack LoganAnd the cyst And the RF. Evergrande entered the list in August, while many were added only in May.

“Our reduction is a reflection of the current extremely challenging operating environment for real estate developers in China along with a tight funding environment for all of them,” said Kelly Chen, vice president and chief analyst at Moody’s Investors Service, in a phone interview Thursday.

“We’ve all seen contracted sales have been very weak, and we haven’t seen a very large recovery responding to supportive policies,” she said, noting that the impact would likely be felt in the second half of the year.

Funding Challenges

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

“In terms of developer financing, I think the market knows that since the second half of last year, commercial banks have sent drastic alerts to the sector, especially the private sector. [non-state-owned] Hans Fan, vice president of China and Hong Kong research at CLSA, said in a phone interview last week.

He said there is still some caution. “What we’ve been seeing since the beginning of the year is that banks are lending more to state-owned companies for merger and acquisition purposes,” he said. “This is encouraging.”

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At a high-level government politburo meeting in late April, Beijing called for promoting a stable and healthy real estate market, and urged the support of local governments in improving regional real estate conditions. The leaders emphasized that the houses were for living and not for speculation.

However, Chinese real estate developers are also facing a difficult financing environment abroad.

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

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

Expect more defaults

China’s huge real estate sector has come under pressure in the past two years as Beijing seeks to reduce developers’ heavy reliance on debt for growth and increase home prices.

Many developers, notably Evergrande, have released Billions of dollars in US dollar debt. Investors are concerned that the default could extend to the rest of the Chinese economy, the world’s second largest.

Evergrande defaulted in December. Many other Chinese property developers have also defaulted or defaulted on interest payments.

Moody’s said Moody’s expects to see more property developers in China default this year. She said the agency covers more than 50 names in the industry, more than half of whom have a negative view or are under review for a rating downgrade.

The company estimates that real estate and related sectors account for 28% of China’s GDP. On Tuesday, Moody’s lowered its 2022 GDP growth forecast for China 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 that the real estate market remains weak.

China’s National Bureau of Statistics said on Wednesday that real estate investment during the first five months of this year fell 4% compared to the same period a year ago, despite the overall growth in investment in fixed assets.

Real estate prices in 70 Chinese cities remained low in May, up 0.1% from a year ago, according to a Goldman Sachs analysis of official data released Thursday.