Property Market Chartbook, July 2021

After this week’s market turmoil, investors looking for what sector might fall next into Beijing’s regulatory crosshairs should direct their attention to the property industry. Recent policy signals have reinforced tightening messages, consistent with Beijing’s consumer welfare-centric policy actions in recent months. New starts, land sales, and construction momentum continue decelerating, but sales volumes continue growing. Credit events within the sector are becoming more frequent with markets heavily focused on the fate of Evergrande, China’s largest developer.

Posted July 29, 2021
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LGFVs: Playing a Losing Game

We conducted a detailed survey of the 2020 financial results of 2,760 local government financing vehicles (LGFVs). The details show dramatic reductions in operating profit and returns on assets, as well as these firms’ increasing reliance on subsidies and debt growth to maintain financial health. This year, rising credit market pressures and policy changes from Beijing reducing funding options are amplifying LGFVs’ financial stress. Local governments themselves want to support their financing platform companies, but many lack the capacity and resources to do so. As a result, LGFV defaults within domestic markets are inevitable. The key questions are when implicit guarantees on these firms will break, and how financial markets will react to the fallout.

Posted July 28, 2021
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Mapping Corporate Bond Defaults

Slower credit growth and efforts to reduce government leverage have compounded pressures in China’s credit markets. Our calculations show that corporate bond defaults jumped to 142 billion yuan in the first half of 2021, compared to 52 billion yuan in the first half of 2020. Downgrades of credit ratings in 1H 2021 have more than tripled from last year, which should produce many more defaults in the coming months. Total corporate bond defaults could top 400 billion yuan this year, around 3.5-4.0% of all bonds maturing.

State-owned enterprises (SOEs) accounted for more defaults early in the year, while property developers continued to lead overall defaulters by industry. The island province of Hainan is seeing the highest ratio of defaulted bonds, but most defaults are taking place in northeastern provinces.

Posted July 26, 2021
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