(Bloomberg) – Home prices in China are at risk of a “significant decline” regardless of what happens to the China Evergrande Group, analysts at Citigroup Inc. said, further dampening the country’s economic growth.
“It seems clear that even under an orderly restructuring, the property sector in China is likely to face downward pressure,” analysts including Dirk Willer wrote in a note dated Thursday. “While the authorities try to limit the fall in house prices due to the fire sales by Evergrande by implementing price floors, price controls generally do not work. The note was titled “A Bear Market in Chinese Real Estate.”
Evergrande, the world’s most indebted developer, has not yet said whether it has paid interest due Thursday to holders of its dollar bonds. The company will then have a grace period of 30 days to make payment before a technical fault can be declared. Beijing financial regulators have encouraged Evergrande to take all possible steps to avoid a near-term default on dollar bonds, although investors are banking on a debt restructuring.
China’s slowing housing market is one of many campaigns President Xi Jinping is leading as he seeks to lower the cost of raising a family and reduce leverage in the financial system. Yet it is also one of the most difficult goals to achieve given the vital importance of the sector to the economy – the industry accounts for nearly 30% of gross domestic output and 40% of household assets.
Data this month showed home sales in value fell 20% in August, while secondary market prices fell for the first time since February 2020.
There are growing fears that the impact of these policies is spiraling out of control. China must ease the pressure on indebted developers before the pain inflicted on Evergrande spreads too far and undermines the economy, Bank of America Corp economists said. earlier this month. Nomura Holdings Inc. considers the headwinds to real estate to account for more than half of the slowdown in Chinese growth in the second half.
While Beijing has several options to support homeownership if needed — and some analysts say it’s too early to reverse the trend — Citigroup says previous policies such as easing restrictions on second-home buyers may not not be effective. This is because of weaker demand and a more saturated market – in other words, many people already have several homes and won’t want another one.
The fallout would be most pronounced in global commodity markets, as well as in emerging market credit and currencies, according to Citigroup’s simulation based on China’s last severe housing downturn in 2014.
“We fear that China’s slowdown will ultimately impact commodities, which are a key economic driver for many emerging economies,” Citigroup analysts wrote.
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