The list of promoters real estate troubled Chinese continues to lengthen. Most recently, Redsun Properties warned on Friday that it is unlikely to pay its bond coupon (originally due last month) before the grace period which ends on August 12. The 88e Chinese promoter has also warned that it may no longer be able to meet its next bank and bond maturities on other “offshore” coupons. “A default-like process has begun,” Fitch reported.
The markets are worried about the proliferation of corporate defaults in China. The “zero” policy Covid puts the world’s second largest economy under pressure and shocks household and business incomes. Already in bad shape, the real estate sector, once a pillar of Chinese growth, is sinking into crisis. Chinese borrowers defaulted on a record $28.8 billion offshore bonds this year, according to data compiled by Bloomberg. The number is expected to increase further this year, according to Goldman Sachs analysts.
Default risks mainly concern the real estate sector . More than a third of bond defaults in 2021 were already from promoters. Since the fall of Evergrande last summer, home buyers have been worried. And the crisis in the sector is getting worse. Since mid-July, several tens of thousands of off-plan home buyers have refused to pay the monthly installments relating to their mortgage, unhappy to see the delivery of their homes suspended or delayed due to the stoppage of several building sites. of construction.
Wave of boycott
Around 300 stopped worksites have been identified in at least 90 cities, in a context of growing financial difficulties. This wave of boycotts is a blow for real estate developers, whose funding is increasingly dependent on the receipts from their pre-sales. If all unfinished projects were to end in mortgage boycotts, Natixis estimates that losses could reach 2.3 trillion yuan, or 6% of total mortgages.
“The mortgage boycott could have a cascading effect on other stakeholders,” warns Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis, for whom “the mortgage boycott in China is the tip of a huge iceberg”. Due to the sluggish market, house price growth has slowed and home sales could fall 30% in 2022. “This could affect the ability of developers to service their debt and make payments to contractors . Supply chains, from upstream materials to downstream appliances, are all potential victims,” the economist continues.
Chinese banks
Chinese banks are also exposed, via the increase in non-performing loans (NPLs) on their balance sheets. According to Jefferies, a bankruptcy of all national real estate developers would lead to an increase in NPLs on banks’ balance sheets by 388 billion yuan (56 billion euros). “However, rising mortgage risk may pose the biggest threat to banks, as these loans represent 11% of their assets, more than the 4.5% exposure to real estate companies,” said Alicia Garcia. Herrero.
The situation comes at a time when central and local authorities have repeatedly urged banks to increase their efforts to finance struggling property developers and allow them to deliver pre-sold homes. But the payment defaults in the real estate sector and the weakening economy made banks reluctant to lend, despite the influx of liquidity into the system. The loss of confidence affects the demand for credit and this will be difficult to restore. “It would take Herculean actions on the part of political decision-makers, likely to restore confidence, to have a chance of redressing the situation,” said the Natixis economist. Apart from this optimistic scenario, the most likely is a worsening of systemic risk with a downward effect on China’s already weak growth. »