China’s real estate sector was again in the spotlight in July, as many angry Chinese buyers halted mortgage repayments on pre-sold units that were delayed or stalled.
Since mid-July, the number of impacted projects – many of which are being developed by the indebted China Evergrande Group – has risen from around 30 to more than 300 in 91 cities across China in a matter of days, with Henan province the most severe. . The market also expects blocked payments from construction suppliers.
The protests indicate how deep China’s housing problems have become, escalating from a developer debt crisis to a nationwide revolt.
With government coordination, banks were considering offering a mortgage grace period to buyers of unfinished properties and considering launching a pilot program to convert stalled projects into long-term rental apartments, Bloomberg reported on July 18.
Asian investor has learned from fund managers that the magnitude of payment suspensions so far is small compared to the broader market, at 5-6% of mortgages at most.
However, the real estate sector has long been one of the most important engines of growth for China, and its importance is unprecedented with its multifaceted impact on bank lending, household wealth and the economy in general.
This week, Asian investor asked fund companies how asset owners should read the crisis and how it will affect investments in China.
The following contributions have been edited for clarity and brevity.
Carol Lye, Associate Portfolio Manager and Principal Research Analyst
Early estimates show the amount of subprime mortgages could range from 500 billion yuan ($73.9 billion) to 2 trillion yuan ($295.7 billion). This would lead to an increase in banks’ ratio of nonperforming loans to mortgages from 1.5% to 4.5%. China’s banking system is reasonably capitalized, however, so banking stress should be manageable.
There are two channels where this could affect macro stability. The liquidity squeeze is one of them. So far, interbank rates have remained stable and the People’s Bank of China (PBOC) continues to add liquidity. The second effect could be seen in home buying sentiment. Sentiment is already weak and if mortgage defaults persist, home purchases could weaken further, threatening China’s growth.
That said, the macro scenario above will have an impact on asset classes in China. Investors will demand Chinese sovereign bonds as they are considered a safe haven. Indeed, we have seen Chinese government bond yields fall in the face of rising global yields. On the credit market, the size of the real estate debt market is shrinking and structurally this sector could find it difficult to see investments return as long as default resolutions are slow.
Finally, the slowing macroeconomic environment could impact the stability of the Chinese renminbi, although increased infrastructure spending could potentially help offset the long-term real estate slowdown.
Alan Wang, Portfolio Manager
Top Global Stocks
This comes as no surprise to us, as the private real estate developer’s overseas debt market has already reflected the difficult situation, and we expect most of them to default and see liquidity outages until further notice. in the fourth quarter, when the meeting of the 20th National Congress of the Communist Party of China will end. .
As an investor, we have been looking at large public enterprise (SOE) developers since Q4 2021 who could take more market share, which turned out to be a good move. The marginal negative concerns the banking sector, which is by nature at the end of the cycle, and could integrate more non-performing loans on its balance sheet, in particular with the intervention of regulators to ensure social stability.
A rough estimate of this event suggests it could impact the net profit of the banking system in the low single digits of 2023 earnings. , namely Henan province in China, will suffer more.
Anthony Wong, Senior Portfolio Manager
Allianz Global Investors
While we don’t view the event as a broader systemic threat – delayed real estate projects only account for around 1% of overall mortgage balances – nonetheless, it is a reminder that it will take a long time to overcome the full impact of repression. on highly leveraged real estate developers.
Even a relatively small increase in defaults presents significant risks for less well-capitalized smaller banks. It also increases the possibility that larger institutions will be required to perform “national service”. And with real estate developers facing a peak in bond maturity over the next 1-2 months, it could be a bumpy time for the real estate and financial sectors.
That said, our overall more constructive view on the economy and market outlook remains unchanged. Recent economic data has indicated a significant rebound from the end of Shanghai’s lockdown and – as long as the Covid outbreaks remain relatively under control – we expect an increasingly growth-friendly policy framework to provide new impulses in the coming months. Notably, the new credit growth figures in June were extremely strong, supported by high levels of government and local bond issuance, which will be used to support areas such as infrastructure projects.
Yuting Shao, macro strategist
State Street World Markets
Given that the boycott so far represents only a small fraction of the total outstanding mortgage loans, the magnitude of the impact on the banking sector and the financial system at this stage is probably not severe enough. to induce systemic risk.
But of course, the situation remains fluid with uncertainties of risk of contagion either from broader mortgage boycotts which increase the size of non-performing loans for banks, or from potential ripple effects on upstream and downstream sectors which could amplify the risks.
As the situation gains more attention and given the importance of housing to household wealth and social stability, regulators will likely introduce policies in the near future to provide clarity to homebuyers who are affected by stalled projects to anchor expectations and guide banks to lend funds to developers. to ensure the completion of the construction.
The volatility and uncertainty surrounding the mortgage boycott situation will have some impact on investor sentiment, but attention going forward remains focused on the macroeconomic outlook and China’s economic recovery path in a more challenging global environment for asset owners deciding their exposure to China.
Marcella Chow, Global Market Strategist
JP Morgan Asset Management
In the near term, the continued, albeit still modest, decline in house prices coupled with escalating mortgage denials will likely weigh on housing demand sentiment as well as overall market sentiment. However, the value of subprime mortgages appears low in the context of overall household credit, while the magnitude of the mortgage boycott is not significant at this point.
In fact, the problem of unfinished buildings is not new, but there is more concern about how it further weakens buyer confidence, especially the potential contagion to healthier private developers, as buyers may not being able to easily distinguish between the healthiest developers versus the distressed ones.
We believe that decisive and effective regulatory action is needed to prevent it from turning into a systemic risk and it is essential that the government quickly restore confidence and cut the circuit of a possible negative feedback loop.
For China’s real estate sector, we expect higher quality developers to continue to gain market share despite a shrinking overall market. We also believe that stock selection remains key when investing in Chinese assets. With active management, we continue to favor sub-sectors with strong political support, including renewables, decarbonization and high-end manufacturing.
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