Worries that China’s worsening real estate sector problem is choking what little economic momentum there is have increased in response to missed payments on investment products by a major Chinese trust firm and a decline in home prices.

Angry investors were informed by a top official that Zhongrong International Trust Co., which has historically had significant real estate exposure, has neglected to make payments on dozens of investment products since late last month.

China’s $3 trillion shadow banking industry is roughly the size of Britain’s economy, and over the past year, worries about its disproportionate exposure to real estate and threats to the larger economy have intensified.

As many private investors are exposed to the high-yielding trust instruments, a run of defaults in the shadow banking sector might have a wide-ranging chilling impact. In the absence of more robust assistance measures from Beijing, missed payments may have an adverse effect on the already shaky consumer confidence.

Following disappointing news on Tuesday, Barclays was one of several international banks to lower its projections for China’s growth in 2023, citing a faster-than-expected decline in the property sector. It decreased its growth prediction from 4.9% to 4.5%.

According to numerous observers, the central bank’s simultaneous surprise interest rate reduction won’t be sufficient to stop the economy’s downward trend.

Given that youth unemployment is at record highs of above 21% and deflationary price pressures are reducing companies’ profit margins, some economists claim that many consumers and small businesses may already be experiencing economic suffering on a par with that experienced during a recession. In July, the number of new bank loans hit a 14-year low.

Despite an increasing number of developers missing payments, China has so far mainly avoided a spillover of a debt pressure in the real estate sector to the country’s $57 trillion financial system.

Beijing nevertheless maintains a firm hold over the banking industry and domestic financial markets, despite extensive reforms over the previous few decades. However, reports of new defaults have raised concerns about contagion.

China’s new home prices decreased in July for the first time this year, adding to the gloom. This is just the latest in a spate of dismal data that highlights the need for more aggressive policy support.

According to calculations by Reuters based on data from the National Bureau of Statistics (NBS), prices decreased 0.2% countrywide month over month and 0.1% annually.

But outside of the nation’s megacities, including Shanghai and Beijing, the situation is even worse. For the 17th consecutive month in June, the average new home prices in the 35 smallest cities assessed by NBS decreased year over year.

Numerous homebuyers have been scared away by the deepening financial issue at key developers, including Country Garden (2007.HK), the No. 1 private developer in the nation. As a result, real estate investment, home sales, and new construction have been on the decline for more than a year.

Country Garden advertised “five-star living” to the general public in lesser-known, smaller cities, but concentrating there has backfired on the company. Its situation has sparked worries that its debt issues would spread to the faltering economy.

Some observers claim the fall, coupled with the shock from three years of rigorous COVID policies, has had an extraordinary impact on activity given that the real estate market has historically made up around a quarter of China’s economy.

The majority of analysts anticipate greater drops in home sales and prices in the upcoming months.

As the poor Chinese statistics and the lack of any significant stimulus from Beijing continued to weigh on market sentiment, global stocks declined on Wednesday for the third time in four days.

China observers are urging the government to use more forceful support measures to help the economy recover from Tuesday’s dismal data.

The urgency of those calls has increased as a result of Zhongrong Trust’s missing payments. Chinese retail investors who are in a panic are asking listed companies about their exposure to Zhongrong.

“The good news is that regulatory vigilance means a rerun of the 2008 U.S. crisis is unlikely,” Gavekal Dragonomics’ Xiaoxi Zhang wrote on Wednesday.

“The bad news is that debt strains from property developers and local-government financing vehicles are spreading across China’s economy.”

China’s housing market is still having trouble, despite an extension of financial support for developers and incentives for first-time homebuyers and upgraders, underscoring the challenges facing regulators.

At a Politburo meeting last month, China’s senior officials committed to change the country’s property laws. The housing authority has also advocated for measures to support the industry, such as lowering home mortgage rates and down payment requirements for first-time buyers and removing mortgage restrictions for those looking to remodel their houses.

A few of the property limitations have already been loosened in some areas, including Zhengzhou. Provincial capitals like Xian and Fuzhou are thinking about lowering the down payment requirements for citizens purchasing second homes.

“We continue to expect more housing easing measures in coming months, including further reduction in down-payment ratios and more relaxation of home purchase restrictions in large cities, among others,” economists at Goldman Sachs said in a note to clients.

The majority of economists anticipate that the real estate recession will last for some time.

“High-frequency data in early August does not suggest any meaningful improvement in the property market,” said Wang Tao, Head of Asia Economics and Chief China Economist at UBS Investment Bank.

“Without additional major policy easing and/or fiscal support, property sales and investment may weaken further or stay at the bottom for longer than assumed in our baseline,” said Wang.

(Adapted from Investing.com)

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