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The evidence suggests that much of the weakness seen in July continued throughout August. Though there are some signs of life in the real estate sector, we continue to believe that, without substantial government action, a significant uptick in growth remains unlikely.
1H14 financial results for China’s largest developers reveal faster debt accumulation, declining profit margins and rising inventories, suggesting that real estate sector risks are starting to rise.
Trust issuance has continued to slow as the value of maturing trusts are rising dramatically, increasing potential default risks. To date, however, policymakers remain reluctant to countenance infrastructure trust defaults, with defaults most likely to occur within the energy and mining sectors.
Our latest analysis of official and industry data highlights the slowdown in shadow financing seen since the middle of 2013, a trend that is raising default risks across a number of key sectors of the economy.
Our analysis suggests that the current slowdown in home sales, rather than the slowdown in shadow bank lending, represents the largest risk to property developers’ finances.
Our latest analysis of local government finances shows that local governments are finding it harder and more costly to access financing. Revenue is slowing, while a large amount of existing debt is coming due, making defaults by a number of local government financing vehicles increasingly likely.
China’s Ministry of Finance has announced that ten provinces and municipalities will be allowed to issue municipal bonds with immediate effect, in line with our predictions. The move underscores the fact that ‘stimulus’ measures implemented by Beijing will likely be within the parameters of reform, with the announced boost to infrastructure investment to be funded through funding reforms, rather than monetary loosening.
We continue to believe that Beijing retains the policy options to avert a local government debt crisis, but it will be harder for the authorities to prevent one in 2014 than in 2013 or 2012.
China pledged at the end of a key conference in Beijing today to achieve “reasonable” economic growth in 2014 while pushing forward reforms to control local government debt and combat industrial overcapacity. We think that 7% is the most likely official target for GDP growth next year, a rate of expansion that could accommodate a forceful reform drive that may be directed particularly at industrial overcapacity and debt-ridden local governments.
State-owned banks have quietly been lending to state-owned enterprises at reduced interest rates so far this year, buoying the economy but at the expense of bank profits
11 Sep 2014
