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Weakening finances at Chinese developers put pressure on Beijing to act

Weakening finances at Chinese developers put pressure on Beijing to act

File photo. A man rides a bicycle next to a construction site near residential buildings in Beijing, China, on Jan 13, 2021. (Photo: Reuters/Tingshu Wang)

SHANGHAI: Third-quarter earnings from China's property sector and ancillary industries show that Beijing's crackdown on rampant borrowing is inflicting pain far beyond just the embattled China Evergrande Group and could force the authorities to ease policy.

Evergrande's long-drawn debt crisis has not spilled into China's broader financial markets as feared, but the worsening health of China's US$5 trillion property sector is testing Beijing's resolve to press on with painful structural reforms.

"Evergrande is not too big to fail, but the sector is," said Ronald Chan, Hong Kong-based Asia head of equities at Manulife Investment Management.

"Any consequent, potential impact on property prices in China will be detrimental."

Seven of the top 10 China-listed developers by revenue, including China Vanke and Greenland Holdings, posted sharp falls in net profit during the July-September period, according to their quarterly reports.

Greenland's earnings dropped 27 per cent while Vanke's profit fell 23 per cent compared with a year earlier. Risesun Real Estate Development's profit tumbled 61 per cent.

The list does not include Hong Kong-listed Chinese developers including Evergrande, Country Garden Holdings, or Guangzhou R&F Properties, which do not need to disclose third-quarter results under local rules.

A separate list of 20 major China-listed developers tracked by Citic Securities, which includes firms such as Gemdale and Yango Group paints a picture of lower margins, shrinking cash piles, and rising balance sheet risks.

The slowdown in the property market following tough measures this year to cool a frothy market, including lending curbs, property price caps and land sales restrictions, is hitting other parts of the economy.

Reflecting the collateral damage, China-listed makers of construction materials including cement, glass and home furnishing, recorded a 7 per cent fall in third-quarter profit on average, according to Changjiang Securities.

Suzhou Gold Mantis Construction Decoration, a major building decoration engineering firm, reported a 52.6 per cent drop in net profit while sales tumbled 31 per cent. The company, which counts Evergrande as a client, said it is actively pursuing the 4.3 billion yuan (US$672 million) in receivables owed by the heavily-indebted developer.

Property market woes "impact the real economy more than the financial markets, where prices were quickly adjusted to prevent wider contagion," said Wei Yao, chief economist for APAC & China at Societe Generale Corporate and Investment Banking.

"What we're seeing is more like a slow motion correction, rather than a fast-moving crisis," which will potentially lead to a deeper, and longer slowdown in China, barring stimulus, she said.

China's financial regulators have already asked banks not to overreact in implementing property lending curbs, after the world's second-largest economy grew just 4.9 per cent in the third quarter, the slowest pace in a year.

The People's Bank of China has resorted to targeted easing, keeping cash conditions just comfortable and rates steady since cutting them at the beginning of the coronavirus pandemic in 2020.

Some economists say more policy support is warranted.

Ren Zeping, economist at Soochow Securities, urged the government this week to "lend its hand" as the economy loses steam amid the property market stagnation, credit tightening and rising raw material costs.

Societe Generale's Yao said China should further lower financing costs this year - through cuts to the amount of cash banks must keep as reserve and benchmark lending rates - to prevent economic growth from falling below the critical 4 per cent pace in 2022.

"Chinese policymakers are willing to tolerate deeper slowdown" to move forward with structural reforms, she said. "But it's a delicate balance. If you don't lend your hand in a timely manner, it could be too late to rescue the economy."

Source: Reuters/aj

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