Goldman Sachs expects more Chinese real estate defaults, switches to suit

Moody’s estimates that real estate and related industries account for more than a quarter of China’s economy.

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BEIJING – Chinese real estate defaults have risen so much that Goldman Sachs analysts have moved to their worst-case scenario for the most risky segment of the market.

Twenty-two Chinese high-yielding bond issuers, related to the real estate sector, have either defaulted on their US dollar-denominated bonds or have defaulted on their debt through bond exchanges, analysts Kenneth Ho and Chakki Ting wrote in a report. Friday.

“Due to the increase in stress, we have raised our FY22 China Property HY default rate forecast to 31.6% (up from 19.0% previously), which was our previous beer case estimate,” analysts said.

They raised their estimate for the Asia High Yield Corporate Default Rate to 15.5%, up from 9.3% previously, as Chinese property dominated the segment. The new forecast is slightly lower than last year’s 17.8% default rate, the report said.

Moody’s estimates that real estate and related industries account for more than a quarter of China’s economy.

Beijing has sought to reduce speculation in its once-heated property market. Over the past two years, regulators have focused specifically on reducing the reliance of property developers on debt for growth. Some companies have adjusted, but others, such as Evergrand, have worried investors about the size of their debt and the potential for large-scale defaults.

The same Goldman analysts wrote in a separate report on Friday, “We do not see a broad recovery in Chinese property HY until property sales begin to show signs of a reversal.”

“We believe that further simplification measures are probably needed before property sales can be restored, especially with the Covid restrictions in several Chinese cities,” they said, adding that they expect strong developers to perform much better than weak ones in the current environment.

Since March, mainland China has faced its worst covidian outbreak in two years, with travel bans and home stays in many parts of the country, especially the Shanghai metropolis.

Sales have dropped as agents and potential buyers are unable to see the property – already on a weak market.

According to a separate Goldman analysis released on Monday, the volume of daily property transactions across 30 major cities fell by 50% year-on-year in May.

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This month, Chinese authorities lowered mortgage rates and a benchmark for those rates. Several local governments have also reduced down payments or announced other measures to make it easier to buy property locally, according to state media.

The central government’s rate cuts send a significant signal of policy support for the property market, Larry Hu, McCurry’s chief China economist, said in a note on Friday.

He noted that over the past two years, Beijing’s property policy has been so tight that the average mortgage rate has exceeded the average debt rate, which he called “extremely unusual.”

April will probably be the lowest point for the property sector this year, Hu said. In his view, unemployment has risen so much that demand for property and credit has fallen so low that “policymakers have no choice but to take steps to save the housing market.”

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