S&P Global Ratings said today that contagion risks are rising in China’s property market, driven by sentiment hits from news headlines of distressed developers, including China Evergrande, the country’s largest.
This is according to an ePDF we published today, titled “China’s Contagion Risks Rise.”
“Headlines are hitting homebuyer sentiment and spreading contagion to the broader residential property market,” said Charles Chang, the Greater China Country Lead for S&P Global Ratings.
“Home sales in China fell 17% in September, year on year, as more buyers absorbed news of developer defaults and property tax trials,” said Mr. Chang.
“We expect China’s home sales to fall 10% in 2022 and 5% to 10% in 2023, with an up-to 3% drop in prices. This could be the first multiyear sales decline in the market’s history.”
“Higher reliance on residential land sales may lead to contagion to local governments and local government financing vehicles as land prices fall,” Mr. Chang added. “Residential land now makes up about 85% of land-sale revenues, 20 percentage points more than a decade ago.”
The government’s COVID stimulus indirectly drove up home prices from the middle of last year. The need to cool buying and slow prices led to tightening policies and will keep any loosening temporary and marginal, in our view.
Individual developer defaults will have limited direct impact on China’s vast and highly fragmented residential market, but they can spread contagion through headlines. Thirteen percent of homebuyers now expect prices to fall versus 10% in 2019. Though still a minority, this is enough to affect sales volumes. Meanwhile, those expecting prices to rise dropped 9 percentage points.
In credit markets, contagion beyond Asia has been limited, as investors based in the U.S. and Europe are likely to have little direct exposure. However, events this year have led Asian corporates to underperform their Latin American peers for the first time in three years.
Within Asia, the effect has been largely confined to China, and within China, to speculative-grade issuers in the real estate sector.
That said, volatility is likely to remain elevated, as more and larger defaults occur and as the property market continues to weaken.
This report does not constitute a rating action.
Source : Company