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China's economy could be pulled down by less confidence in the property sector

Less confidence in the property sector could harm China's economy.

August 3, 2022: -Analysts cautioned that failing faith in China’s property sector could provide a contagion that would also drag down the Chinese economy.

The comments come after beleaguered developer China Evergrande Group failed to deliver a promised $300 billion restructuring plan over the weekend.

In filings with the Hong Kong stock exchange, Evergrande said it had “preliminary principles″ in place for restructuring its offshore debts. It also said one of its subsidiaries, Evergrande Group, had been ordered to pay an unnamed guarantor 7.3 billion yuan for forgetting to honor its debt obligations.

“For the government, the priority is to break the negative feedback loop that features the high leverage ratio and the liquidity crunch on the part of the developers,” Shuang Ding, Standard Chartered chief economist for Greater China and North Asia, told CNBC.

“That leads to a mortgage boycott and meager appetite on the part of the homebuyer, and that runs back to the developer because low sales affect its liquidity.”

“So if this problem is not handled properly, it will have a profound impact on the economy, including the government balance sheet, the banks’ balance sheet as well, and households,” Ding added.

Ding said the problems in China’s property sector threaten a crucial foundation of a sturdy economy: market confidence.

Land sales, which comprise a dominant portion of provincial government revenue, have fallen 30% in the past year.

The economist said Beijing should ringfence the issues in the property sector and deal with them holistically, rather than with a piecemeal approach, to avoid mass insolvencies.

Dan Wang, Hang Seng Bank’s chief China economist, said the government could do this by making sure the companies in trouble have enough money to finish building half-started homes or complete a sold project.

The Chinese politburo last week signaled the country could miss its 5.5% GDP growth target for the year. At the same time, new data showed China’s factory activity contracted unexpectedly in July after bouncing back from Covid-19 lockdowns in June.

While Beijing is taking the property sector crisis seriously, it is unlikely the Evergrande crisis will be resolved anytime soon and may never be resolved at all, CreditSights’ co-head of Asia-Pacific research Sandra Chow said.

“I think it’s going to take a long time for investors to get confidence not just in Evergrande but in the China parcel sector as a whole,” Chow said.

“China’s property market is in difficulty, despite all the easing measures and asset values falling, especially in the lower tier regions as well. So it’s going to be difficult to rebuild confidence,” Chow added.

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