China’s real estate sector continues to suffer as two of the biggest companies in the sector, Greenland Holdings and E-house, had their credit ratings downgraded by S&P Global, a rating agency, according to Reuters.
It follows a third round of missed interest payments by the country’s second-largest property developer and one of the world’s most indebted companies, the Evergrande Group.
Some experts warn that a collapse of Evergrande could soon be on the horizon, which could be joined by two other companies, Fantasia and Modern Land. The former’s credit rating was recently downgraded to default or near-default status, and the latter has requested an extension because he is unable to pay his debts.
With some economists estimating that the real estate sector accounts for up to 28% of China’s GDP, the importance of industry in the country plays a more central role than in many other parts of the world.
Given the importance of the sector, Logan Wright, director of Chinese markets research at Rhodium Group and associate researcher at the Center for Strategic and International Studies, warned that the problem could be difficult for Beijing to compensate for, which means that the problem could go beyond its regulatory powers. .
“The contagion is already spreading through Chinese financial markets as more developers face funding pressures,” Wright said. Newsweek. “It’s one thing to say the problem is controllable, it’s quite another to control it. At some point, waiting too long to respond to this market turmoil can become a political mistake.”
Wright said the stakes are high for Beijing. President Xi Jinping recently took steps to curb the influence of Western-style capitalism in China and ordered local governments to prepare for the fallout from an Evergrande collapse. However, as Beijing’s position has become more apparent, the problems within the sector have only worsened.
“Credit stress has been building up in China’s financial system for quite some time,” he said. Newsweek. “But the recent focus on problems in the real estate sector has amplified this pressure by reducing property sales nationwide, which is likely adding financial stress to other developers and contributing to defaults.”
Whereas in the past, Beijing imposed restrictions on the number of formal loan promoters who worked around those regulations by borrowing from “shadow banks or informal institutions,” Wright said.
In early 2020, however, the country introduced a new system designed to curb lending and strengthen regulatory oversight, Wright wrote in a September 2020 report. It began grouping developers into different categories based on their debt ratios. indebtedness, their net indebtedness (a measure of financial leverage) and their cash-to-debt ratio. Most of the top 30 developers have not met these three thresholds, which has slowed their ability to grow by taking out additional loans.
Under these regulations, Wright predicted that credit dynamics would slow and construction activity would decline. As Evergrande faces a number of unfinished projects, it has been difficult to raise enough cash to pay its debts. Time will tell how China’s response might lessen the magnitude of this problem.