Chinese real estate defaults have increased so much that Goldman Sachs analysts have shifted their worst-case scenario for the riskiest part of the market.
Twenty-two China high-yield bond issuers, all related to the property sector, have either defaulted on their U.S. dollar-denominated bonds or deferred repayment with bond exchanges since the start of the year, according to a report Friday.
The analysts raised their FY22 China Property HY default rate forecast to 31.6%, which was their previous bear case assumption.
Since Chinese property dominates the category, they have raised their estimate for the Asia high yield corporate default rate to 15.5%. According to the report, the new forecast is slightly lower than last year.
Moody's estimates that real estate and related industries account for 25% of China's economy.
Beijing has tried to control speculation in its property market. The last two years have seen regulators focus on reducing dependence on debt for growth. Some companies have adjusted, but others like Evergrande have worried investors with the size of their debt and the potential for large-scale default.
Goldman analysts wrote in a report Friday that they are unlikely to see a broader recovery in China Property HY until property sales begin to show signs of a rebound.
We believe that more easing measures are required before property sales can recover, particularly with Covid restrictions in place across a number of cities in China, and we expect stronger developers will perform better than weaker ones in the current environment.
The worst Covid outbreak in two years has resulted in travel restrictions and stay home orders in many parts of mainland China.
With agents and potential buyers unable to view properties, sales have plummeted.
The Goldman analysis shows that the daily property transaction volume in 30 major cities was down 50% in May.
The Chinese authorities cut mortgage rates this month. According to state media, several local governments have announced measures to make it easier to buy property in the area.
Larry Hu, chief China economist at Macquarie, said in a note Friday that the central government's rate cuts send a significant signal of policy support for the property market.
He pointed out that for the past two years, Beijing's property policy has been so tight that the average mortgage rate has been higher than the average loan rate.
Hu said that April would likely be the low point for the property sector this year. Policymakers have no choice but to take actions to save the housing market because of the high unemployment and falling credit demand.
All Rights Reserved © 2024
