China’s real estate market woes threaten the fate of the financial system

August 29, 2022 3:56 p.m. STI

Hong Kong, Aug 29 (ANI): China’s property market continues to trend lower as a series of mainland developers report sharp slowdowns and even reversals from strong first-half profits of the year last before the outbreak of the current crisis.
As the Chinese government scrambles to shore up the sector, the pain is starting to show up on banks’ lending books, with potential implications for the health of the entire financial system.
On Tuesday, Hong Kong-listed midsize developer Ronshine China Holdings warned that its net loss for the first six months would be between 4.3 and 4.8 billion yuan ($627 million and $700 million), in down from its 684.5 million. yuan profit a year ago, as noted by Asia Nikkei.
The company’s chairman, Ou Zonghong, in a statement to the stock market, blamed “the difficult business environment in the real estate industry and the continued impact of the COVID-19 pandemic.”
In addition to impairment charges on some unnamed projects, Ou said a sharp drop in property sales and a slowdown in construction had hit the Shanghai-based company particularly hard. “In the first seven months, the company’s contract sales fell 53% to 46.3 billion yuan,” he said.
Ronshine is far from alone. Zhenro Properties Group, another Shanghai-based and Hong Kong-listed developer, expects a net loss of up to 3 billion yuan in the first half, compared with a net profit of 1.16 billion yuan a year ago.
Central China Real Estate, a mid-sized home builder in northern Henan province, said its net loss could reach 6 billion yuan, Asia Nikkei reported.
Many others barely avoided net losses. Yuzhou Group Holdings, which defaulted on its offshore bond coupon payment in March, said its net profit for the first six months was between 55 and 65 million yuan, down 92 to 94 percent from it a year ago. .
Country Garden Holdings and Times China Holdings have warned investors that their respective net profits could drop 99% year-on-year.
Lists of losses and profit warnings from developers testify to the seriousness of their financial situation. Kelly Chen, senior analyst at Moody’s Investors Service, said the latest announcements were “credit negative” even though their results were broadly in line with her expectations.
“We believe revenue growth and profit margins for these developers have declined in the first half and will continue through the remainder of 2022, given the challenging operating environment and challenging funding conditions,” she said. declared.
The pressure on margins comes from the deep discounts these developers are offering to customers, Chen said, explaining that this is one of the few remaining ways to support their declining liquidity as “weak investor sentiment has limited their access to financing, particularly in offshore bond markets, since the start of the year.”
She hinted that a ‘re-rating’ of some promoters’ credit ratings could be in order if there were signs of worse than expected deterioration in financial and liquidity positions in their official mid-year earnings announcements. , which are supposed to be done by Wednesday.

Beijing, meanwhile, is looking for ways to bolster the real estate sector.
One of the latest measures came from the People’s Bank of China, which on August 22 cut the one-year prime lending rate by 0.05 percentage points to 3.65%, and the five-year lending rate by 0.15 percentage points to 4.30%.
On the same day, Yi Gang, the central bank governor, encouraged banks to “take the initiative enough and act as a backbone” to support the lagging economy, specifically mentioning the need to “ensure reasonable financing requests in the real estate sector,” among other steps.
The rate cuts put the PBOC at odds with its global peers, which are almost universally raising rates to fight inflation, Asia Nikkei reported.
But Ting Lu, chief China economist at Nomura, said the impact on the real estate sector will be “small”, pointing out that many banks have already cut their lending rates much deeper as overall demand for mortgages rises. decreased.
And tariffs, he added, are only a small piece of the puzzle. “The main factors behind the fall in demand for new homes are declining confidence in developers’ commitment to delivering homes, slowing income growth, rising unemployment and heightened uncertainty. due to the zero COVID strategy.”
With little relief in sight for the property sector, banks are feeling the sting – and bracing for more pain. A number of Hong Kong-based banks with exposure to mainland Chinese borrowers reported large write-offs of their loans to the real estate sector in the first half of the year.
Impairment charges for HSBC were $1.1 billion, a sharp reversal from a positive reversal of $700 million a year ago. Standard Chartered’s total credit impairment charges for the period amounted to UDS 267 million, substantially all of which came from China’s commercial real estate sector.
Dah Sing Banking Group, a medium-sized lender in Hong Kong, said on Wednesday that its credit losses for the first six months had increased by 160% to 305 million Hong Kong dollars. “A relatively large part” of that was related to real estate in mainland China, according to Nicholas Mayhew, the bank’s deputy managing director.
He pointed out that total exposure to the sector is relatively low – at “a low single-digit percentage of our total loan portfolio” – but added that the bank would remain vigilant. “The sector still looks uncertain, and therefore we would need to be prepared for further impairment charges,” he said.
The impact was also seen in a few continental banks. The Postal Savings Bank of China, one of the largest lenders by assets, said its non-performing loans (NPLs) to the real estate sector stood at 1.79 billion yuan at the end of June, a multiplication by 82 compared to last December. This figure is especially apparent as the bank’s overall NPL value fell 19%, Asia Nikkei reported.
China Merchants Bank’s NPLs to property developers doubled over the same period to 11.20 billion yuan, pushing up its overall bad debt level by 11%. The bank reported 22.79 billion yuan in loan losses in the first half of the year, a 58% jump from a year ago, mainly due to undisclosed “certain real estate customers”.
A number of mainland banks, including the four largest state and regional lenders, are expected to report results by Wednesday. Despite Beijing’s repeated comments on the overall strength of the banking sector’s asset quality, details of their results could reveal damage to their loan portfolios.
China is currently suffering its worst economic downturn in decades after the government cut debt in the property sector, which accounts for about a third of economic output, and led to a collapse in property prices. This has combined with the negative impact of the government’s strict zero-Covid policy. (ANI)

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Don F. Davis