Iron ore dropped for the first time in nine sessions as Goldman Sachs warned that China’s property sector is expected to grapple with “persistent weakness” for years. The investment bank’s analysts said the problems would continue dragging on the country’s economic growth. Weaknesses are particularly pronounced in lower-tier cities and private developer financing, which is the source of many problems. Private developers are also facing liquidity shortages, and the offshore credit market has become too expensive for them to rely on. Many of them are likely to face creditor meetings or court appearances to discuss debt restructuring plans, and some could even be forced into liquidation, with China Evergrande Group expected to unveil such a plan later this year.
Despite the problems, however, Goldman’s analysts expect developers to improve their financial conditions gradually. They’ll focus on building smaller, more affordable apartments and seek to reduce borrowing costs by cutting interest rates, deferring mortgage payments, and offering buyers a tax break for buying new houses within a year of selling their old ones. They’ll also cut development fees and improve sales channels. In addition, some large state-owned developers may benefit from a shakeout that will allow them to take more market share away from privately owned builders with weak balance sheets.
But slowing the property market will also affect other parts of the economy. It will impede job growth in construction and related industries, crimp household spending and send ripples through the broader economy, dampening demand for products such as steel, cement, and UPR (a chemical used to make roofing and piping) used in building projects.
In the long term, however, the property sector’s problems are expected to prompt policymakers to make changes. In a speech on Monday, the governor of China’s central bank, Yi Gang, said that the government was ready to use “all policy tools” to stabilize the real estate market. “We are determined to ensure that housing is for shelter, not speculation,” he said. And he added that “a healthy property market is crucial for the whole economy.”
Investors are cautiously optimistic, but many remain skeptical that a recovery will occur soon. Shunsuke Takeda, chief financial officer of Japanese property firm Orix Corp., says his firm remains committed to the Chinese market despite its challenges. He notes that the housing market is still significant for households who see their homes as their primary asset and whose home equity accounts for more than half of all assets in urban areas. Two years ago, Orix took a risky bet in the Chinese market, investing in China’s first leasing company. That venture proved costly because of the country’s inadequate legal framework and curious attitude toward debt. But Orix’s latest foray into the Chinese property market is a more measured one, and based on the firm’s track record of success in other markets, Takeda has reason to hope.
