Zhongrong International Trust Co., which traditionally had significant real estate exposure, has missed payments on dozens of investment products since late last month, a senior official told investors.
China’s $3 trillion shadow banking sector is roughly the size of Britain’s economy, and concerns about its outsized exposure to property and risks to the wider economy have grown over the past year. past year.
A series of failures in the shadow banking sector could have a far-reaching chilling effect, as many individual investors are exposed to high-yielding fiduciary products. Missed payments could weigh on already fragile consumer confidence in the absence of stronger support measures from Beijing.
Barclays was among a number of global banks to lower its China growth forecast for 2023 after weak data on Tuesday, citing a faster-than-expected deterioration in the property market. It lowered its growth forecast to 4.5% from 4.9%.
So far, China has largely managed to avoid tighter housing sector debt spilling over to the country’s $57 trillion financial industry, despite a growing number of developers who default on their repayment obligations.
But the announcement of new defaults has raised fears of contagion.
Adding to the gloom, new home prices in China fell in July for the first time this year, the latest in a string of pessimistic data that underscores the urgency for bolder policy support.
Prices fell 0.2% month-on-month nationwide and 0.1% year-on-year, according to Reuters calculations based on data from the National Bureau of Statistics (NBS).
But the situation is much worse outside of the country’s megacities like Shanghai and Beijing. Average new home prices in the 35 smallest cities surveyed by the NBS fell for the 17th straight month in June on a year-over-year basis.
A worsening debt crisis among major developers, including Country Garden (2007.HK), the country’s largest private developer, has spooked many home buyers, with real estate investments, home sales and new construction contracts for over a year.
Given that the real estate market traditionally accounts for around a quarter of China’s economy, some analysts say the crisis, combined with the shock of three years of strict COVID measures, has had an unprecedented impact on activity.
Most analysts expect further declines in home prices and sales over the next few months.
More help needed
Tuesday’s data added to a string of weak economic indicators over the past few months and sparked calls from China watchers for authorities to roll out bolder support measures to halt the downward spiral.
Gerwin Bell, PGIM’s chief fixed income economist for Asia, said Country Garden’s troubles underscored that the fallout from the property market crash has not been contained and is rippling across economy.
“Stopping the negative fallout from housing will require significantly larger fiscal stimulus than authorities have considered so far. We expect Chinese authorities to come to the same conclusion soon.”
“Easing measures”
China’s real estate sector continues to struggle despite an extension of financial support for developers and incentives for first-time buyers and renovators.
Among 70 cities, 49 saw a month-over-month decline in new home prices in July, compared to 38 cities the previous month.
Last month, China’s top leaders at a Politburo meeting pledged to adjust housing policies.
The housing regulator has also called for efforts to support the sector, such as lowering mortgage rates and down payment ratios for first-time buyers and easing mortgage restrictions for people who want to upgrade their homes.
Some cities, including Zhengzhou, have already eased a handful of property restrictions in a bid to bolster sentiment. Provincial capitals like Xian and Fuzhou are planning to reduce the down payment ratio for residents who will buy their second apartment.
“We continue to expect more housing easing measures in the coming months, including a further reduction in down payment ratios and easing of home purchase restrictions in major cities, among others,” Goldman Sachs economists said in a note to clients.
However, most economists expect the decline in home sales and prices to continue for some time.
“The high-frequency data from early August does not suggest any meaningful improvement in the housing market,” said Wang Tao, head of Asian economics and chief China economist at UBS Investment Bank.
“Without additional major policy easing and/or fiscal support, real estate sales and investment could weaken further or stay low for longer than expected in our baseline scenario,” Wang said.
