China’s Property Slump to Ripple Through Other Sectors Long Term: Analysts

A worker watches as he prepares to cross a street outside a construction site in Beijing on April 26, 2022. Wang Zhao/AFP via Getty Images

With property sales falling faster in October and investment in real estate plummeting, analysts fear that the permeating risks of the real estate crisis will spread to other sectors of China’s economy.

Despite Beijing’s recent actions and measures, analysts believe the spillover effects will persist in the “foreseeable future.”

“The prolonged property market downturn is resulting in adverse spillover effects to other nonfinancial corporate sectors through direct and indirect channels, [while] most sectors will face [the] effects for foreseeable future,” said Moody’s in a client note viewed by The Epoch Times on Nov. 14.

The first round will be the direct impact, mainly through decreased economic activity, including the property-related supply chain. The indirect effect will follow as “a feedback loop of a weakened macroeconomic environment and weaker consumer, and investment sentiment that also leads to lower borrowing propensity and risk aversion,” the note said.

According to data released by the National Bureau of Statistics on Thursday, new home prices in China fell for the fourth month in a row in October, with dozens of cities witnessing declines—marking the most substantial downturn since the peak of the COVID-19 pandemic last year. This trend implies a broader weakening in the sector that could potentially impede the overall recovery of the country.

The median price of a new home in 70 major cities declined by 0.4 percent in March, the biggest monthly drop since the 0.5 percent drop in February 2015. Costs were down 0.3 percent in September.

The reduction in real estate investment by 9.3 percent during the first 10 months of the year also worsened from the 9.1 percent decline seen during the first nine months.

The authorities’ recent efforts, like loosening limits on home purchases and lowering borrowing costs, have failed to shore up recovery in the sector, experts said.

In a special report released on Tuesday, Nomura estimated that “there are around 20 million units of unconstructed and delayed pre-sold homes. To put this into perspective, it is equivalent to 20 times the size of a Country Garden as of end-2022. We also estimate that the total funding gap to complete the remaining units would be around yuan 3.2 trillion.”

The large number of pre-sold but uncompleted residences is the primary obstacle to a real estate revival, the report said, adding, “At some point next year, the issue of home delivery could turn into a social issue and endanger social stability.”

Buyers may become increasingly impatient while waiting for the delivery of their newly acquired homes as the property sector crumbles and debt-ridden property developers fail to deliver pre-sold units. China observers say the property crisis could cause social unrest.

Pervasive Threats

Nevertheless, while China’s prolonged property downturn has had the worst spillover effect on sectors mainly related to the supply chain, such as building materials and construction machinery, the adverse effects have also been significant in areas such as regional and local government finances, as well as local government financing vehicle (LGFVs), according to Moody’s.

They also reverberate across the economy, with risks spreading through several channels.

Chinese banks and financial institutions, for example, are at the top of the risk list. “Banks will face increasing spillover risks in the second round of impact from the property sector, if the market distress has a severe negative impact on China’s economy,” said Moody’s.

Chinese banks’ non-performing assets or bad debts are expected to bloat, considering the property sector makes up a large part of their balance sheets, and it will take time for new sectors like high-tech and green financing to fully replace declining property and related sector demand.

According to Moody’s, China’s banks and financial institutions face considerable risks not only from the distressed property developers but also from LGFVs and supply chain companies.

Banks’ profitability and capital are also under strain, given that the government expects them to back the real economy and resolve LGFV bloating debt issues by extending loan maturities or replacing loans with lower interest rates.

For similar reasons, non-bank financial institutions, including distressed asset management and trust companies with direct exposure to the property sector, will face asset quality pressure, the ratings agency added.

That aside, during the first round of the downturn, industries such as steel, chemical, and transportation, as well as businesses involved in home appliances, natural gas delivery, and auto rentals—those directly supplying products or services to the property development sector—will also be the hardest hit.

The second wave of the downturn will affect other nonfinancial corporate sectors that are not directly linked to the property sector but are vulnerable to changes in overall funding conditions or market confidence. These include automobile manufacturers and auto parts suppliers, integrated oil and gas companies, mining, including coal and metals, retail, surface transportation and logistics companies, and trading enterprises.

Long-Term Problem

Analysts believe the property crisis is a long-term issue that will impede the world’s second-largest economy for years.

For one, policymakers in China have significant problems as they attempt to manage a progressive deleveraging, limit financial systemic risk, and maintain support for economic growth in the face of a slowing housing market.

Secondly, the slow recovery in China’s real estate market is also slowing the country’s economic growth, said Everbright Security in a note released on Thursday.

Authorities have also been more selective in their “willingness to provide support to the [property] sector compared with previous periods of aggressive stimulus, such as in 2015,” according to Moody’s.

“[Consequently,] lower policy support means that developers and property buyers are more uncertain about the future for property sales and prices respectively. This increases the risk that the property downturn may be more protracted than the authorities expect,” Moody’s said.