In September 2023, a residential building was under construction in the Phoenix Palace project developed by Country Garden Holdings Co., Ltd. in Heiyuan City, Guangdong Province, China.
Bloomberg
BEIJING – China’s state-led economy could be setting the stage for a new wave of bond defaults as early as next year, a report from S&P Global Ratings showed on Tuesday.
The rating agency noted that this would be the third round of corporate defaults in nearly a decade.
Against this backdrop, China’s default rate remains extremely low amid concerns about overall growth in the world’s second-largest economy.
“What policymakers really need to focus on is whether the current guidance is creating perverse incentives for the economy,” Chaoyang Zhang, head of Greater China at S&P Global Ratings, said in a phone interview on Wednesday.
Data from Standard & Poor’s show that China’s corporate bond default rate will fall to 0.2% by 2023, the lowest level in at least eight years and well below the global default rate of around 2.6%.
“To some extent, this is not a good sign because we do not believe that this difference is the result of market operations,” Zhang said. “Last year we saw governments issuing directives or guidelines to prevent defaults in the bond market.”
“The question is: What will happen to the bond market when the bond market default avoidance guidelines expire?”
In recent years, Chinese authorities have emphasized the need to be vigilant against financial risks.
But especially in the real estate sector take drastic measures to solve the problem may have unintended consequences.
Over the past three years, Beijing has cracked down on developers’ over-reliance on debt, which has led to a downward spiral in the property market. This is a time when large industries are dragging down the economy while the real estate industry shows some signs of improvement.
S&P said the housing sector led the latest wave of defaults between 2020 and 2024. Earlier, their analysis showed that industrial and commodity companies defaulted the most between 2015 and 2019.
“The big question for the government is whether the real estate market can stabilize and housing prices stabilize,” Zhang said. “This could mitigate some of the negative asset impact we’ve seen since the middle of last year.”
Most of Chinese household wealth comes from real estate rather than other financial assets such as stocks.
Economic growth concerns
S&P found that bond default rates fell in most sectors last year, except for technology services, consumer and retail.
“This is a sign of potential weakness in the growth slowdown we are seeing now,” Zhang said.
China’s economy grew 5.2% last year, with Beijing targeting GDP growth of around 5 percent by 2024. The economy is expected to slow further in the coming years after decades of double-digit growth, with analysts forecasting generally around or below that pace.
China’s massive public, private and hidden debt has long raised concerns about potential systemic financial risks.
Vitor Gaspar, director of the International Monetary Fund’s fiscal affairs department, told a conference that China’s debt problem is not as urgent as Beijing’s real estate problem, which needs to be addressed through a broader “comprehensive strategy.” Press conference last week.
Other aspects of the strategy include China’s emphasis on innovation and productivity growth, as well as the need to strengthen social safety nets to make households more willing to eat, he said.
It remains to be seen whether other sectors can offset the real estate sector’s drag on the economy and boost overall growth.
UBS upgraded MSCI China’s stock rating to “overweight” on Tuesday, citing strong corporate earnings performance and unaffected by trends in the real estate market.
“The largest stocks in the China index have generally performed well in terms of earnings/fundamentals,” Sunil Tirumalai, chief GEM equity strategist at UBS, said in a report. Therefore, China’s underperformance is entirely due to the fall in valuation.” Early signs of a rebound in consumption now make us more optimistic about earnings.”
The bank also raised its outlook for Hong Kong stocks.
Talking about why UBS has changed its view on China valuation, Tirumalai pointed to the “rising trend in Chinese stocks”. Chinese companies have expressed positive surprises on dividends/buybacks.”
“If global markets become more concerned about geopolitics, and longer-term scenarios, greater visibility of shareholder returns may come into play. We will be watching closely for further steps in market reforms,” he added.
