China’s real estate sector continues to suffer as two of the biggest firms in the sector, Greenland Holdings and E-House, downgraded their credit ratings by rating agency S&P Global. according to Reuters.
This comes after the Evergrande Group, the country’s second largest property developer and one of the world’s most indebted companies, defaulted in the third round of interest payments.
Some experts have warned that the collapse of Evergrande may soon be on the horizon, with two more companies involved—Fantasia and Modern Land. had a previous credit rating recently downgraded for default or near default situation, and the latter has asked for extension as it is unable to pay its loans.
Some economists estimate that the property sector accounts for 28 percent of China’s GDP, with the importance of industry within the country playing a more central role than in many other parts of the world.
Given the region’s importance, Logan Wright, director of China’s market research at the Rhodium Group and an adjunct fellow at the Center for Strategic and International Studies, warned that it could be hard for Beijing to offset the problem, meaning it could The issue may spread outside its regulatory powers. .
“The infection is already spreading in China’s financial markets, as more developers face funding pressure,” Wright said. newsweek. “It is one thing to say that the problem can be controlled, it is another to control it. At some point, waiting too long to respond to this market turmoil may be a policy mistake.”
Wright said the stakes are high for Beijing. President Xi Jinping recently took steps to stem the influence of Western-style capitalism in China and directed local governments to prepare for the fallout of the Evergrande collapse. However, as Beijing’s stance has become more clear, problems within the region have become even more apparent.
“Credit tensions have been building up within China’s financial system for some time,” he said. newsweek. “But the recent focus on problems in the property sector has increased that pressure by slashing property sales across the country, potentially adding to the financial strain on other developers and contributing to defaults.”
Whereas in the past Beijing has banned the number of developers giving formal loans who were working around these rules by borrowing from “shadow banks or informal institutions,” Wright said.
However, in early 2020, the country introduced a new system designed to curb borrowing and promote regulatory oversight, Wright wrote in a September 2020 report. It began grouping developers into different categories based on their debt-to-asset ratio, net gearing (a measure of financial leverage), and their cash-to-debt ratio. Most of the top 30 developers failed to meet these three limits, slowing their ability to grow by taking on additional loans.
Under these rules, Wright predicted that credit momentum would slow and construction activity would decline. As Evergrande faces several unfinished projects, it has faced challenges in bringing in enough cash to pay off its debt. Time will tell how China’s response can narrow the scope of this problem.