China's contagion risks over property are rising: S&P

November 10, 2021

HONG KONG -- S&P Global Ratings said today that contagion risks were rising in China's property market, driven by sentiment hits from news headlines of distressed developers, including China Evergrande, the country's largest.

"Headlines are hitting homebuyer sentiment and spreading contagion to the broader residential property market," said Charles Chang, the Greater China Country Lead for S&P Global Ratings.

"Home sales in China fell 17% in September, year-on-year, as more buyers absorbed news of developer defaults and property tax trials.

"We expect China's home sales to fall 10% in 2022 and by 5% to 10% in 2023, with an up-to 3% drop in prices. This could be the first multiyear sales decline in the market's history."

Chang said higher reliance on residential land sales could lead to contagion to local governments and local government financing vehicles as land prices fall. Residential land now makes up about 85% of land-sale revenues, 20% more than a decade ago.

"The Government's COVID stimulus indirectly drove up home prices from the middle of last year," he said. "The need to cool buying and slow prices led to tightening policies and will keep any loosening temporary and marginal, in our view.

"Individual developer defaults will have limited direct impact on China's vast and highly fragmented residential market, but they can spread contagion through headlines.

"Thirteen percent of homebuyers now expect prices to fall versus 10% in 2019. Though still a minority, this is enough to affect sales volumes. Meanwhile, those expecting prices to rise dropped 9 percentage points."

Chang said that in credit markets, contagion beyond Asia had been limited, as investors based in the U.S. and Europe were likely to have little direct exposure. However, events this year had led Asian corporates to underperform their Latin American peers for the first time in three years.

Within Asia, the effect had been largely confined to China, and within China, to speculative-grade issuers in the real estate sector.

"That said, volatility is likely to remain elevated, as more and larger defaults occur and as the property market continues to weaken." (ATI).