The debt problems of a Chinese property developer have now reached a critical artery of China's industrial engine, the steel sector. This has started to ripple out to other crucial parts of the second-largest country in the world.
Chinese property
Policymakers should be aware of the growing balance-sheet crisis at real property firms. A swing in fortunes in the steel industry could have serious repercussions on China's economy. Cement, glass and household appliances are all susceptible to falling demand.
Steel prices have fallen from record highs earlier this year, due to less demand from construction activities. Share prices of steelmakers have also been affected.
Steel's keen sensitivity to changes in construction and manufacturing makes the company a key indicator of China's economy. The slowdown has begun to show signs since the second quarter. The steel firms are large employers and support a huge supply chain.
In China real estate market is complicated and changing explained this lawyer in China.
Real estate developers in China
Real estate developers are reducing investment in steel operations to save cash in a sector that is being squeezed by tighter borrowing rules. This has engulfed many indebted companies like China Evergrande Group.
"We usually stockpile steel products in winter for relatively low prices, and then sell them after the new-year holidays when consumption resumes." We are holding back this year," stated Qi Xiaoliang (a Beijing-based steel trader).
He said that there is still uncertainty in the 2022 real estate market and that the situation will not be completely reversed for six to twelve months.
The property market suffered a further blow in the last quarter of 2021. Unease in the sector caused a shakeup in buyer sentiment. In November, unsold housing stock reached a five year high in China's 100 largest cities.
In 2022, demand for houses is expected to decrease further, which will impact downstream producers of household products.
Another construction material, cement production, fell by around 16percent in September-November compared to the same period between 2017-2019. In recent months, there has been a drop in demand for earth excavators.
You can also see the wider spillover effects of the property slump elsewhere. For example, the monthly output of refrigerators in the appliances industry has been declining from May to November, on an annual basis.
The debt problems of a Chinese property developer have now reached a critical artery of China's industrial engine, the steel sector. This has started to ripple out to other crucial parts of the second-largest country in the world.
Policymakers should be aware of the growing balance-sheet crisis at real property firms. A swing in fortunes in the steel industry could have serious repercussions on China's economy. Cement, glass and household appliances are all susceptible to falling demand.
Steel prices are already down from record highs earlier this year, due to lower demand from construction activities. This accounts for more than half of the metal's total consumption. However, steelmakers' share prices have been hit.
Steel's high sensitivity to changes in construction and manufacturing makes the firm a key indicator of China's economy.
To save cash in a sector that is struggling to meet steel production, real estate developers have slowed down investment in projects in order to preserve cash. Most notably China Evergrande Group (3333.HK).. read more
"We usually stockpile steel products in winter for relatively low prices, and then sell them after the new-year holidays when consumption resumes." We are holding back this year," stated Qi Xiaoliang (a Beijing-based steel trader).
China's property
China's outlook for property could improve over the coming months, but there are two things that must occur in order for the sector to recover, an analyst told CNBC Friday.
Logan Wright, director, China markets research at Rhodium Group, stated that stabilizing property sales and allowing more access to Chinese funds could help boost the real estate industry in China.
"Conditions are clearly emerging for a more positive outlook for the Chinese real estate sector, the economy as a whole and for implications for risk asset management."
He said that there is still uncertainty in the 2022 real estate market and that the situation will not be completely reversed for six to twelve months.
The property market suffered a further blow in the fourth quarter of 2021. Unease in the sector caused a shakeup in buyer sentiment. In November, unsold housing stock in China’s 100 largest cities reached a five year high. Read more
In 2022, demand for housing is expected to rise further, which will impact downstream producers of household products. Read more
Another construction material, cement production, saw a 16% drop in September-November year on year. It was also lower than the same period between 2017-2019. In recent months, there has been a drop in demand for earth excavators.
You can also see the wider spillover effects of the property slump elsewhere. For example, the monthly output of refrigerators in the appliances industry has been declining from May to November, on an annual basis.
China Beige
According to data from China Beige Book International and other sources, bank credit is being extended to property firms at an even higher level than during any period in the second or third quarters. Mortgage lending increased to 200 billion Yuan ($31bn) in October, compared to 150 billion yuan ($23.5bn) in the previous month.
Officials in Chengdu (the capital of Sichuan's southwestern province) are speeding up approvals for property loans and home sales. They also ease restrictions on the use of proceeds from presales. Some cities have relaxed rules regarding land parcel sales in response to cash-strapped developers who are reluctant to bid for land.
They are likely to keep following their policy to cool the real estate market. However, regulators have indicated that banks are likely to loosen credit control after they indicate that excessive reactions to policies are the cause of the slowdown.
China's realty sector
Officials have described China's realty sector as a threat to economic stability. It accounts for 25% of China's economy. China is home to eight of the 10 largest property developers worldwide. Beijing knew about the danger of overleveraging long before Evergrande's debt crisis sent investors reeling.
Beijing started restricting borrowing in August 2020 with the "three redlines" policy. This stipulates that developers who are looking to refinance must have a 70% ceiling on liabilities to assets (exempting advance proceeds from contracts), a 100 percent cap on net debt and equity, and a cash to short-term borrowing ratio of no less than one.
https://www.chinawhisper.com/top-10-of-chinese-real-estate-firms/
These restrictions have led to a decline in house prices, house sales, and new construction this year. Real estate investment growth, which was 38.3 percent at its peak in January, fell to 21.6 percent, 10.9 percent, and 7.2 percent respectively in October, April, July, and July.
Qazi stated that "the former growth model, which was high in debt, high investment and high growth, is no longer viable." "Beijing realizes it must shift to a more sustainable model that will allow for slower growth.
Qazi stated that Beijing seemed to be flexible in its approach to restructuring the sector.
He said that Beijing is working with the local governments of 200 cities in which Evergrande still has unfinished projects. "They are creating task forces to assess the condition of these unbuilt properties, and transfer them to new development so Chinese households receive what they have paid for." The government has adopted a flexible policy in relation to leverage by allowing the developers to keep the outstanding debt from these properties off their balance sheets.
