China’s economic woes are compounded by falling house prices as trust companies default on payments

  • China’s economic slowdown is deepening amid a lingering asset crisis
  • Exposure to real estate threatens leakage of financial institutions
  • Big trust company defaults on payments to investors
  • New home prices fell in July, and many cities are down
  • Tuesday’s rate cuts weren’t enough to deter bearish analysts

BEIJING/HONG KONG, Aug 16 (Reuters) – A leading Chinese fund company said a lack of cash for investment products and falling home prices added to concerns that China’s deepening property sector crisis is sapping what little momentum the economy has left.

Zhongrong International Trust Co., which has traditionally had significant real estate exposure, has missed payments on dozens of investment products since late last month, a senior official told angry investors.

China’s $3 trillion shadow banking sector is roughly the size of Britain’s economy, and concerns about its assets and risks to the wider economy have grown over the past year.

A range of defaults in the shadow banking sector could have a widespread chilling effect as many individual investors are exposed to high-yielding trust products. Missed payments could weigh on already weak consumer confidence in the absence of strong support measures from Beijing.

Barclays was among several global banks to cut their forecasts for China’s 2023 growth after weak data on Tuesday, citing a faster-than-expected decline in the housing market. It cut its growth forecast to 4.5% from 4.9%.

Many analysts said the central bank’s surprise interest rate cut on the same day may not be enough to stem the economy’s downward spiral.

Some economists say many consumers and small businesses may already be feeling deep economic pain during the recession, with youth unemployment at more than 21% and deflationary price pressures cutting into companies’ profit margins. New bank loans fell to a 14-year low in July.

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So far, China has managed to avoid defaulting on repayment obligations, despite an increasing number of developers trying to avoid a debt drain on the country’s $57 trillion financial sector.

Even after sweeping reforms over the past decades, Beijing has maintained a strong grip on the banking sector and domestic financial markets. But news of the new normal has fueled fears of contagion.

Falling housing prices

Adding to the gloom, China’s new home prices fell in July for the first time this year, the latest in a string of downbeat data to underscore the urgency for bolder policy support.

Prices fell 0.2% month-on-month and 0.1% year-on-year on a nationwide basis, according to Reuters calculations based on data from the National Bureau of Statistics (NBS).

But outside the country’s megacities like Shanghai and Beijing, the picture is much worse. Average new home prices in the 35 smallest cities surveyed by the NBS fell for the 17th month in June on a year-over-year basis.

The worsening credit crunch at major developers, including the country’s No.1 private developer Country Garden ( 2007.HK ), has spooked many homebuyers, property investment, home sales and new construction contracts for more than a year.

The Country Garden promised „five-star living” to people in less popular, smaller towns, but the focus on those areas is back to haunt it. Its plight has raised fears that its debt problems will ripple through the stalled economy.

The property market traditionally accounts for about a quarter of China’s economy, and some analysts say the slump, combined with the shock of three years of severe COVID measures, has had an unprecedented impact on activity.

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Most analysts expect further declines in home prices and sales in the coming months.

Global stocks fell for the third time in four sessions on Wednesday as disappointing Chinese data and the lack of meaningful stimulus from Beijing continued to weigh on investor sentiment.

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Tuesday’s sharp data sparked calls from China watchers for authorities to take bolder support measures to get the economy back on a more solid footing.

Missed payments from trust company Zhongrong have added urgency to those calls. Curious Chinese retail investors are raising questions about Zhongrong’s exposure to listed companies.

„The good news is that regulatory oversight means a repeat of the 2008 US crisis is unlikely,” wrote Xiaoxi Zhang of Kavegal Draconomics on Wednesday.

„The bad news is that the debt burdens of property developers and local-government financing vehicles are spreading across China’s economy.”

Facilitating measures

China’s property sector continues to struggle despite financial support for developers and the extension of incentives to first-time home buyers and upgraders, highlighting the difficulties facing policymakers.

Last month, China’s top leaders pledged to adjust property policies at a Politburo meeting. The housing regulator has also emphasized efforts to boost the sector, such as lower home mortgage rates and lower rates for first-time home buyers and easing mortgage restrictions for people looking to upgrade their homes.

Some cities, including Zhengzhou, have already relaxed some property restrictions. Provincial capitals such as Xian and Fuzhou are considering lowering downpayment rates for residents buying second flats.

„We continue to expect more housing easing measures in the coming months, including further reductions in down payment rates and further easing of home buying restrictions in major cities,” economists at Goldman Sachs said in a note to clients.

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However, most economists expect the property decline to drag on for a while.

„High-frequency data from early August did not suggest any meaningful improvement in the property market,” said Wang Tao, head of Asia economics at UBS Investment Bank and chief China economist.

„Without additional key policy easing and/or fiscal support, asset sales and investment may weaken further or remain below expectations for a longer period of time than assumed in our baseline,” Wang said.

Reporting by Qiaoyi Li, Liangping Gao, Jason Xue, Ziyi Tang and Ryan Woo; Additional reporting by Matt Tracy in Washington and David Barbuccia in New York; Written by Sumeet Chatterjee; Editing by Sam Holmes, Sri Navaratnam and Kim Coghill

Our Standards: Thomson Reuters Trust Principles.

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