If China’s real estate crisis continues to widen, it will certainly affect other important industries. Analysts point out that three businesses are most vulnerable.
According to CNBC, Fitch Ratings analyzed in a report that China’s real estate crisis will affect more than 30 different types of businesses and government entities over the next 12 to 24 months. Fitch found that there are three types of businesses that are most vulnerable.
The report said, “If timely and effective policy intervention does not materialize, distress in the property market will be prolonged and have effects on various sectors in China.”
Fitch also warned that the recent wave of “lending suspensions” could further erode confidence in the real estate market, delay the recovery, and directly affect the Chinese economy. Here are three types of businesses that are most vulnerable to real estate troubles.
1. Asset management companies
The report said these firms “hold a sizable amount of assets that are backed by real estate-related collateral, making them highly exposed to prolonged property-market distress.”
2. Engineering, construction firms (non-state-owned)
“The sector, in general, has been in difficulty since 2021. … They do not have competitive advantages in infrastructure project exposure or funding access relative to their [government-related] peers,” the report said.
3. Small-scale steel producers
Many have been operating at a loss for a few months and could face liquidity issues if China’s economy remains lackluster, especially given the high leverage in the sector.
Fitch said that construction accounts for 55% of steel demand in China.
Earlier, Li Ganbo, founder and chairman of Hebei Jingye Iron and Steel Group, also warned at a company meeting in June that China’s steel industry could face difficulties for five years and nearly a third of China’s steel mills may go bankrupt.
Leland Miller, managing director of China Beige Book, an independent U.S. research firm specializing in steel industry research, once said: “This time really is different. With property having lost its mantle as the pre-eminent growth driver, key commodities like steel no longer have the benefit of endless credit access.”
Fitch said that the slowdown in real estate has already dragged down broader economic indicators like fixed asset investment and the furniture sales component of retail sales.
The firm also said that the recent “loan suspension” turmoil exacerbated China’s real estate crisis. Official data showed residential home sales fell 32% in the first half of this year from a year earlier, the report noted. The report cited industry research indicating that the top 100 real estate developers suffered even worse performances, with sales falling by 50%.
Although Fitch assumed that China’s real estate sales would grow again next year, analysts warn that a decline in homebuyer confidence could stall the recovery.
“Even if the authorities intervene aggressively, there’s a risk that new homebuyers will still not respond positively to this, particularly if house prices continue to fall, and overall economic outlook is clouded by global economic malaise,” Fitch told CNBC.
Since 2020, Chinese authorities have begun to prevent the excessive use of leverage by real estate developers, which has caused a liquidity downturn and many developers break the capital chain to complete housing projects. Many real estate projects continue to prolong the construction period or remain “unfinished.”
An “unfinished house” is when pre-sold house construction stops. Homeowners are in the dilemma unable to take possession but still having to pay the mortgage.
In desperation, homeowners have to accept credit risk and have more difficulty in buying a home in the future.
In just a few weeks, over 100 cities and at least 327 projects have seen protests, according to Feng News. This also exposes China’s financial system to potential risks.
At the beginning of August, S&P Global Ratings estimated that 2.4 trillion yuan or about $353.9 billion, or 6.4% of total home loans, could be affected if the loan suspension continues to spread.
Within the banking system, smaller regional banks, which account for about 30% of total banking system assets, are at greater risk, Fitch said. However, risks to Chinese banks, in general, could increase if the CCP decides to significantly relax lending standards to help struggling property developers. The report said the companies least affected by real estate problems are insurance companies, food and beverage companies, grid operators, and national oil companies.