DBRS Morningstar: China's Balancing Act: Containing Property Sector Leverage While Preserving Financial Stability
October 20 2021 - 9:36PM
Business Wire
Slowing property sales and tighter financing requirements has
brought Evergrande Group, China’s largest property developer, to
the brink of default. Several other developers have also missed
bond payments. In a new commentary, we look at the recent dynamics
of the Chinese property market, the potential macroeconomic
implications of a slowdown in the sector, and the delicate balance
authorities face between taking a firm stance to contain leverage
in the real estate sector while preserving financial stability.
China's property sector has been a key engine of growth for two
decades. Construction and real estate services increased from 9.6%
of GDP in 2000 to 14.4% in 2020. This has led to rising levels of
indebtedness among property developers, and more recently among
households. In a bid to contain leverage and speculation in the
property sector, regulators in August 2020 introduced stringent
guidelines for both developers and banks, which has resulted in a
slowdown in sales. This has exposed highly leveraged property
developers like Evergrande, which have relied in part on advance
sales of housing units to finance construction activity. The
deleveraging of the property sector will test China’s willingness
and ability to avoid a broader credit crunch and a crash in
property prices. We expect the major Chinese banks will have
adequate capacity and support to absorb credit losses, and
authorities are likely to step in to facilitate an orderly
restructuring of the sector. It is less clear how the government
will respond to declining property prices or the drop in real
estate activity, and the implications these might have for the
Chinese economy and politics.
Key highlights:
- A two-decade debt-fueled expansion in China has generated
economic imbalances and financial fragilities in certain sectors,
including property. Ongoing efforts by Chinese policymakers to
shift the economy toward a more balanced growth mix and ensure
financial stability will likely lead to slower but more sustainable
growth in the future, which we would view positively from a credit
perspective.
- The Evergrande crisis embodies the delicate balance for
authorities between containing leverage in the economy while
preserving financial stability. Regulatory tightening is the key
reason for the stresses in the property sector. Given President
Xi’s emphasis on "common prosperity," authorities are likely to
intervene with an orderly restructuring to prevent a full blown
credit crunch.
- However, orchestrating a shift toward a more balanced growth
mix entails material downside risks in the near-term. The fallout
from developments around Evergrande could have unanticipated
effects that spread through the financial system and economy,
potentially leading to sharply lower growth prospects over the next
few years.
“The Evergrande crisis embodies the delicate balance for
authorities between containing leverage in the economy while
preserving financial stability. The fallout could have
unanticipated effects that spread through the financial system and
economy, potentially leading to sharply lower growth prospects over
the next few years,” notes Rohini Malkani, Senior Vice President in
the Global Sovereign Ratings Group. “Given President Xi’s emphasis
on ‘common prosperity,’ authorities are likely to intervene with an
orderly restructuring to prevent a full blown credit crunch.”
To read the full report, click here:
https://www.dbrsmorningstar.com/research/386308/chinas-balancing-act-containing-property-sector-leverage-while-preserving-financial-stability
The DBRS Morningstar group of companies consists of DBRS, Inc.
(Delaware, U.S.)(NRSRO, DRO affiliate); DBRS Limited (Ontario,
Canada)(DRO, NRSRO affiliate); DBRS Ratings GmbH (Frankfurt,
Germany)(EU CRA, NRSRO affiliate, DRO affiliate); and DBRS Ratings
Limited (England and Wales)(UK CRA, NRSRO affiliate, DRO
affiliate). For more information on regulatory registrations,
recognitions and approvals of the DBRS Morningstar group of
companies, please see: https://
www.dbrsmorningstar.com/research/highlights.pdf. The DBRS
Morningstar group of companies are wholly-owned subsidiaries of
Morningstar, Inc. © 2021 DBRS Morningstar. All Rights Reserved. The
information upon which DBRS Morningstar ratings and other types of
credit opinions and reports are based is obtained by DBRS
Morningstar from sources DBRS Morningstar believes to be reliable.
DBRS Morningstar does not audit the information it receives in
connection with the analytical process, and it does not and cannot
independently verify that information in every instance. The extent
of any factual investigation or independent verification depends on
facts and circumstances. DBRS Morningstar ratings, other types of
credit opinions, reports and any other information provided by DBRS
Morningstar are provided “as is” and without representation or
warranty of any kind. DBRS Morningstar hereby disclaims any
representation or warranty, express or implied, as to the accuracy,
timeliness, completeness, merchantability, fitness for any
particular purpose or non-infringement of any of such information.
In no event shall DBRS Morningstar or its directors, officers,
employees, independent contractors, agents and representatives
(collectively, DBRS Morningstar Representatives) be liable (1) for
any inaccuracy, delay, loss of data, interruption in service, error
or omission or for any damages resulting therefrom, or (2) for any
direct, indirect, incidental, special, compensatory or
consequential damages arising from any use of ratings and rating
reports or arising from any error (negligent or otherwise) or other
circumstance or contingency within or outside the control of DBRS
Morningstar or any DBRS Morningstar Representative, in connection
with or related to obtaining, collecting, compiling, analyzing,
interpreting, communicating, publishing or delivering any such
information. No DBRS Morningstar entity is an investment advisor.
DBRS Morningstar does not provide investment, financial or other
advice. Ratings, other types of credit opinions, other analysis and
research issued or published by DBRS Morningstar are, and must be
construed solely as, statements of opinion and not statements of
fact as to credit worthiness, investment, financial or other advice
or recommendations to purchase, sell or hold any securities. A
report with respect to a DBRS Morningstar rating or other credit
opinion is neither a prospectus nor a substitute for the
information assembled, verified and presented to investors by the
issuer and its agents in connection with the sale of the
securities. DBRS Morningstar may receive compensation for its
ratings and other credit opinions from, among
https://www.dbrsmorningstar.com/disclaimer/ others, issuers,
insurers, guarantors and/or underwriters of debt securities. DBRS
Morningstar is not responsible for the content or operation of
third party websites accessed through hypertext or other computer
links and DBRS Morningstar shall have no liability to any person or
entity for the use of such third party websites. This publication
may not be reproduced, retransmitted or distributed in any form
without the prior written consent of DBRS Morningstar. ALL DBRS
MORNINGSTAR RATINGS AND OTHER TYPES OF CREDIT OPINIONS ARE SUBJECT
TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE
DISCLAIMERS AND LIMITATIONS AT
https://www.dbrsmorningstar.com/about/disclaimer. ADDITIONAL
INFORMATION REGARDING DBRS MORNINGSTAR RATINGS AND OTHER TYPES OF
CREDIT OPINIONS, INCLUDING DEFINITIONS, POLICIES AND METHODOLOGIES,
ARE AVAILABLE ON https://www.dbrsmorningstar.com. Users may,
through hypertext or other computer links, gain access to websites
operated by persons other than DBRS Morningstar. Such hyperlinks
are provided for convenience only, and are the exclusive
responsibility of the owners of such websites. DBRS Morningstar
does not endorse the content, the operator or operations of third
party websites. DBRS Morningstar is not responsible for the content
or operation of such websites and DBRS Morningstar shall have no
liability to you or any other person or entity for the use of third
party websites.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20211020006176/en/
Stephen Bernard Vice President, Corporate Communications +1 212
806 3240 Stephen.bernard@dbrsmorningstar.com