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Financial risks in China’s corporate sector: real estate and be

• Posted by freeamfva jack July 11, 2022 Filed in Other #shanghai stock exchange news  26 views
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  Financial risks in China's corporate sector: real estate and beyond

   

  
  Recent tensions in China's real estate market have highlighted the risks inherent in the country's highly leveraged corporate sector. These risks have been building up for some time, as high investment rates have coincided with high levels of debt accumulation. Moreover, the source of debt has moved beyond the traditional banking sector, with non-bank financial institutions providing financing which is less stable and more susceptible to sudden changes in investor sentiment. In addition, tensions in large corporate sectors could be transmitted to the rest of the economy through a number of channels. These channels include households, which are themselves increasingly leveraged and whose wealth is significantly exposed to the real estate market. A wider Chinese growth slowdown could, in turn, have global repercussions, given the size of the Chinese economy, its important global trade linkages and the central role it plays in international commodity markets. Against this backdrop, this article will review the rise in financial risks in China's economy stemming from increasing private sector leverage, the interconnectedness between the financial and non-bank financial sectors, and households' rising debt exposures.To get more shanghai stock news, you can visit shine news official website.

  Recent stress in the real estate sector has highlighted the tension in China's corporate sector between high rates of growth and high leverage. As the world's second largest economy, China has accounted for around one-third of global GDP growth over the last decade (Chart 1) while, at the same time, its share of global credit to the non-financial sector has increased from around 8% to 20%.
  ] To some extent, this reflects the contribution made by investment spending as one of the main drivers of growth. However, the recent turmoil in China's real estate sector and the payment difficulties experienced by several large Chinese property developers, such as Evergrande, illustrate the risks inherent in the high leverage, high growth and, ultimately, highly interconnected business model that is widespread among Chinese corporates, and real estate developers in particular.

  At the same time, a significant proportion of debt financing originates outside the banking sector. China's debt-to-GDP ratio for the entire private sector now stands at over 250% (Chart 2). Given that the corporate component of this debt is the highest in the world, the banking regulations introduced by the Chinese authorities have increasingly placed limits on the provision of credit to highly leveraged corporates. While China's financial system remains largely bank based, a significant proportion of funding is supplied to the corporate sector by non-bank financial institutions. The so-called shadow banking sector facilitates corporate financing that can circumvent capital constraints and credit regulations. Moreover, investors commonly expect an implicit guarantee for returns on investment products issued by the shadow banking sector. Despite the fact that contracts clearly state that returns are not guaranteed, both individual and institutional investors assume that the issuing financial company and, in some cases, the local or central government, will make up any shortfall if the investments do not deliver the targeted returns.
  ] This leads to a significant underpricing of risks, which results in investor sentiment towards these products being subject to sudden change if a significant shortfall materialises. While the macroprudential regulations adopted by the authorities since 2015 have curbed the growth of shadow banking, its level of outstanding assets remains significant in size and continues to pose risks to the financial system. Moreover, large fintech companies are providing new sources of debt financing to the economy, thereby presenting new and additional challenges to the regulatory efforts made by the authorities to reduce leverage in the Chinese economy.

  Finally, households could increasingly amplify the impact of corporate stress on the broader economy. For instance, household wealth is increasingly dependent on real estate market developments, and risks which materialise in the corporate sector could spill over to household wealth and, therefore, consumption. Similarly, wealth products provided by the shadow banking sector to households intertwine non-bank financial sector and household risks. As the level of household debt has been rising sharply in China, the interdependence of risk exposures in the private sector has given rise to systemic risks in China that could have adverse spillover effects, both domestically and internationally.
  Considering China's global interconnectedness, developments in the country are important for the global economy. The stress in China's property sector has reverberated beyond its borders. Reports of Evergrande's liquidity distress intensified around mid-September (Chart 3, panel a), when the developer reportedly missed the payment deadline on a number of bonds, triggering risk-off sentiment in global financial markets. Global equities fell, temporarily, by around 2-3%, credit spreads widened, and indicators of investor uncertainty rose steadily against a backdrop of flight-to-safety considerations. In addition, metal and oil prices declined, highlighting potentially reduced demand for commodities resulting from a slowdown in real estate activity in China (Chart 3, panel b). While the global spillovers proved to be short lived, in part due to the belief that the Chinese government would take action to mitigate adverse spillovers within its own economy, real and financial shocks in the world's second largest economy have global repercussions. The ECB reported, in the May 2018 and May 2021 issues of its Financial Stability Review, that China's weight and systemic relevance in the global financial system is increasing - even if the country remains relatively isolated financially.[
  ] Against this backdrop, this article will review the rise in financial risks in China's economy deriving from increasing private sector leverage, the interconnectedness between the financial and non-bank financial sectors, and households' rising debt exposures.