FINANCIAL SYSTEM IN CHINA FACES ‘RISING RISK’

Outlook for property sector remains negative because of sluggish demand and weak contracted sales amid slowing economy, Moody’s says

The risks to the stability of China’s financial system are rising because of the downturn in the country’s property sector and a slowing economy, Moody’s Investors Service said.

The rating agency said in a report released on Thursday its outlook for the property sector “remains negative on sluggish demand and weak contracted sales”, although policy support offered by the authorities could help ease the liquidity burden of some developers.

While the property downturn was testing China’s systemic stability, pandemic disruptions and rising geopolitical tensions were also weighing on growth at the same time, the report said.

“Although the authorities continue to have tools to prevent a systemic financial crisis, some of these buffers are weakening and could pose risks if the property downturn endures,” Lillian Li, a Moody’s vicepresident and senior credit officer, wrote in the report.

As a result of the weakness surrounding the property industry, Moody’s cut its growth forecasts for China to 3 per cent this year and 4 per cent in 2023.

The Chinese securities watchdog on Monday announced five measures, including allowing cash-strapped developers to raise equity refinancing after a ban of six years. Analysts and industry players hailed the move as a big step to boost the property sector following a 16-point rescue plan earlier last month.

Six major state-owned banks extended loans totalling 1.27 trillion yuan (HK$1.4 trillion) to at least 17 developers last Thursday, a day after Beijing confirmed the rescue plan.

China’s financial system is inextricably linked to the property sector. According to Moody’s, while banks’ direct exposure to risks from the property sector was limited, their indirect exposure was bigger.

Some of the indirect risks include lending to downstream industries along the supply chain of the property sector and losses resulting from the asset devaluation of collateral amid declines in property prices.

While large banks remained well capitalised and could absorb significant losses, smaller players were more vulnerable to the risks related to the property industry, Moody’s said.

In addition, the central government could enlist support for recapitalisation funds from policy banks, as well as local government and state-owned enterprises, which might increase the debt burden and hurt banks’ financial strength, Moody’s said.

The changing domestic and external macro environment was also contributing to lower policy effectiveness and the government’s capacity to provide support had become more constrained, Li said.

“While financial stability remains a top priority, the authorities have become more selective in their willingness to provide support,” she said.

Separately, a report released by Fitch Ratings on Thursday showed the liquidity of indebted property developers continued to deteriorate.