NEW YORK--(BUSINESS WIRE)--Slowing property sales and tighter financing requirements has brought Evergrande Group, China�s largest property developer, to the brink of default. Several other developers have also missed bond payments. In a new commentary, we look at the recent dynamics of the Chinese property market, the potential macroeconomic implications of a slowdown in the sector, and the delicate balance authorities face between taking a firm stance to contain leverage in the real estate sector while preserving financial stability.

China's property sector has been a key engine of growth for two decades. Construction and real estate services increased from 9.6% of GDP in 2000 to 14.4% in 2020. This has led to rising levels of indebtedness among property developers, and more recently among households. In a bid to contain leverage and speculation in the property sector, regulators in August 2020 introduced stringent guidelines for both developers and banks, which has resulted in a slowdown in sales. This has exposed highly leveraged property developers like Evergrande, which have relied in part on advance sales of housing units to finance construction activity. The deleveraging of the property sector will test China�s willingness and ability to avoid a broader credit crunch and a crash in property prices. We expect the major Chinese banks will have adequate capacity and support to absorb credit losses, and authorities are likely to step in to facilitate an orderly restructuring of the sector. It is less clear how the government will respond to declining property prices or the drop in real estate activity, and the implications these might have for the Chinese economy and politics.

Key highlights:

• A two-decade debt-fueled expansion in China has generated economic imbalances and financial fragilities in certain sectors, including property. Ongoing efforts by Chinese policymakers to shift the economy toward a more balanced growth mix and ensure financial stability will likely lead to slower but more sustainable growth in the future, which we would view positively from a credit perspective.
• The Evergrande crisis embodies the delicate balance for authorities between containing leverage in the economy while preserving financial stability. Regulatory tightening is the key reason for the stresses in the property sector. Given President Xi�s emphasis on "common prosperity," authorities are likely to intervene with an orderly restructuring to prevent a full blown credit crunch.
• However, orchestrating a shift toward a more balanced growth mix entails material downside risks in the near-term. The fallout from developments around Evergrande could have unanticipated effects that spread through the financial system and economy, potentially leading to sharply lower growth prospects over the next few years.

�The Evergrande crisis embodies the delicate balance for authorities between containing leverage in the economy while preserving financial stability. The fallout could have unanticipated effects that spread through the financial system and economy, potentially leading to sharply lower growth prospects over the next few years,� notes Rohini Malkani, Senior Vice President in the Global Sovereign Ratings Group. �Given President Xi�s emphasis on �common prosperity,� authorities are likely to intervene with an orderly restructuring to prevent a full blown credit crunch.�

To read the full report, click here: https://www.dbrsmorningstar.com/research/386308/chinas-balancing-act-containing-property-sector-leverage-while-preserving-financial-stability

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