Start each business day with our analyzes of the most pressing developments affecting the markets today, along with a curated selection of our latest and most important news on the global economy.
Weathering the Real Estate Storm in China
China’s property boom over the past few decades has been a major driver of the country’s meteoric rise to global economic power. But after years of soaring property prices, the property bubble has deflated and the country is in the midst of a prolonged downturn in the property market with effects spilling over to the banking sector.
The real estate sector, which accounts for about 30% of China’s gross domestic product, is facing a cash crunch. Home prices and sales are down, many developers are unable to repay their debts, and several residential construction projects remain unfinished. According to estimates by S&P Global Ratings, around 40% of homebuilders in the world’s second-largest economy are suffering from financial difficulties. These debt-ridden developers present a key credit risk for banks. S&P Global Ratings analysts predict that the non-performing loan ratio of the real estate sector will increase to 5.5% by the end of 2022 and expect developers to see an L-shaped recovery.
The slowdown in the real estate market stems from slowing economic growth largely due to the country’s strict zero COVID policy, coupled with the Chinese government’s efforts to deleverage the highly bloated real estate sector. In a bid to calm the country’s housing frenzy and make housing more affordable for the middle class while reducing developers’ reliance on debt to spur growth, Chinese authorities introduced measures in August 2020 this cap on the amount a company can borrow if it breaches one of three key conditions known as “red lines”. This deleveraging drive has led some of the biggest builders to default on loans and halt construction projects.
Developers’ financial difficulties have further eroded consumer confidence, contributing to a slump in property sales. The delayed projects have also sparked a wave of protests from homebuyers to suspend mortgage payments. The mortgage strikes, should have a limited direct impact on the country’s banks. In a base-case scenario, the strikes are expected to add about 980 billion yuan to Chinese banks’ risky lending, which is only 0.5% of the country’s total loan portfolio. Boycotts should therefore not pose serious problems systemic threat to the banking sector.
Despite their exposure to the real estate market, China’s four largest banks reported net profit growth between 5.0% and 6.0% during the first half. Thanks to sufficient cushions for potential bad debts In the real estate sector, the four megabanks are convinced that they can overcome the threats to the quality of their assets. Regional banks, however, could face more pressure as the country’s economy slows.
Across the Asia-Pacific region, major mainland Chinese banks lead their peers in terms of improvement in capital, liquidity and leverage ratio year over year during the second quarter, according to data compiled by S&P Global Market Intelligence. Big banks in China too fared better than their regional counterparts to grow loans and deposits at a faster pace in the second quarter. However, the outlook remains uncertain in a context of weak borrowing demand.
Relaunch the mortgage applicationthe Chinese government recently eased mortgage costs by cutting interest rates, encouraged banks to lend more to homebuyers, and eased some rules on multiple ownership. Additional stimulus measures aimed at averting a potential property crash, including potential special loans to beleaguered housing projects and government bailout funds, are expected to follow.
Today is Tuesday, October 11, 2022and here is today’s essential intelligence.
Written by Pam Rosacia.
Economy
Economic Snapshot for the Week Ahead: Week of October 10, 2022
This week, a number of key economic releases will add information on macroeconomic conditions in the US, UK and Eurozone after data from the PMI survey hinted at further risks of a global recession. and persistent inflation, albeit with some encouraging rays of light. US retail sales and inflation data will be on the agenda for many this week. US retail sales figures have been hit hard by the rising cost of living, although inflation data should point to further moderation in inflationary pressures, especially after PMI surveys indicated an easing cost pressures.
—Read the article by S&P Global Market Intelligence
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Capital markets
PE Test Drives Blockchain; Elevated risk persists in the consumer discretionary sector
Blockchain technology is looking increasingly like the key that could unlock a huge new market for private equity: the global affluent, a group that holds around $80 trillion in investable capital, according to an estimate often cited by the President of Blackstone Inc., Jonathan Gray. KKR & Co. Inc. in September became one of the latest and largest private equity firms to tokenize part of one of its funds on the blockchain. Each token represents a fraction of a stake in the fund, meaning that individual investors can purchase a slice of the typical ticket size.
—Read the article by S&P Global Market Intelligence
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International trade
Russian maritime crude exports slip to 12-month low as EU ban and price cap looms
Russian crude exports averaged 2.99 million b/d in the month, down 290,000 b/d from August levels and the lowest since September 2021, as global demand oil was still recovering from the pandemic shutdowns, according to data from S&P Global Commodities at Sea. Data excludes Russia’s small share of CPC Blend exports from Kazakhstan. Russian flows to the Netherlands – home to Europe’s largest refining hub – more than halved over the month to 165,000 bpd in September, from 390,000 bpd in August and pre-war levels of around 525,000 bpd, Commodities at Sea data shows.
—Read the article by S&P Global Commodities Outlook
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Sustainability
Utilities Adopt New Tax Tools in US Climate Program to Fund Renewables
U.S. utilities are already poised to take advantage of new transfer benefits from the expanded clean energy investment tax credits and new production tax credits contained in the recent federal climate package. . But experts expect the traditional tax equity market for financing renewable projects to remain robust. Until recently, developers of large-scale wind and solar installations could only monetize tax credits received from the US government by selling them to large financial corporations and other corporations with significant tax liabilities, creating partnerships that owned projects.
—Read the article by S&P Global Market Intelligence
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Energy and raw materials
Listen: APPEC Buzz reflects volatility and changing flows
Richard Swann and Dave Ernsberger, senior executives at S&P Global Commodity Insights, discuss with Joel Hanley the issues highlighted by Singapore’s APPEC event, the first all-in-person edition of Asia’s premier oil forum in two years. Discussion topics included energy security, OPEC+ cuts, Russian oil price caps, Chinese quotas and more, showing once again how this important event is helping to shape the energy conversation.
—Read the article by S&P Global Commodities Outlook
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Technology and media
Growth outlook and debt markets defy Musk’s Twitter deal
Elon Musk’s decision to move forward with his acquisition of Twitter Inc. is good news for shareholders. Industry analysts’ concern is that the deal is not a panacea, especially given the uncertain macro environment and internal turmoil at the company. Musk sent a letter to Twitter this week saying he intended to complete his purchase of the microblogging platform under the original terms of the deal, paying $54.20 per share, or $44 billion. The deal is still “pending receipt of debt financing proceeds,” according to an Oct. 4 SEC filing.
—Read the article by S&P Global Market Intelligence
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