China’s State Developers Warn of Losses as Crisis Spreads

China’s state-owned property developers are warning of widespread losses, fueling concerns that the housing crisis is expanding from the private sector to companies with government backing.

(Bloomberg) — China’s state-owned property developers are warning of widespread losses, fueling concerns that the housing crisis is expanding from the private sector to companies with government backing. 

Eighteen out of 38 state-owned enterprise builders listed in Hong Kong and the mainland reported preliminary losses in the six months ended June 30, up from 11 that warned of full-year losses in 2022, according to a Bloomberg tally based on corporate filings. Two years ago, only four firms with controlling or major state shareholdings posted losses. 

The warnings signal state builders are no longer immune from the two-year housing slump that has weakened the economy and triggered dozens of defaults by private peers, with speculation that Country Garden Holdings Co. may be next. Authorities have in recent weeks stepped up pledges to support the property sector, though analysts are skeptical that the measures will be enough to revive the market anytime soon. 

“China’s property slowdown is already hurting all developers, including the large government-linked ones,” said Zerlina Zeng, senior credit analyst at CreditSights Singapore. “We do not expect the situation to materially improve in the second half.” 

In their warnings, some of the state-owned developers cited declining gross profit margins and heavier provisions to write down asset values stemming from the housing woes. New-home prices fell for a second month in July, government figures showed this week, and Bloomberg reported the situation is even worse than the official data show.  

Companies seeing losses include some of the biggest developers owned by the central government. Shenzhen Overseas Chinese Town Co. warned of a loss of as much as 1.7 billion yuan ($233 million), partly due to a marketing strategy to speed up home sales. That followed a loss in the second half of last year, which was its first since its 1997 listing. 

Players in economically stronger cities are also suffering. Everbright Jiabao Co., operated by a local state asset manager in Shanghai’s Jiading district, said it expects its first ever half-year loss since its listing. 

Still, the loss warnings aren’t necessarily all doom and gloom for state developers, according to Bloomberg Intelligence credit analyst Andrew Chan, who says it’s natural that they would write down their inventories to reflect the slump in values.  

“SOEs could be kitchen-sinking their results for better years ahead,” Chan said. “The key is whether they can still receive liquidity support from banks. For smaller SOE developers, it will be a case-by-case situation.”

But losses will reduce their scope to take on unfinished projects left by defaulted private-sector firms, further denting homebuyer sentiment. Chinese regulators see asset sales as a key step to easing the debt crisis, as President Xi Jinping’s government largely steers clear of direct bailouts.

“Sector consolidation anyhow takes time,” CreditSights’ Zeng said. “Especially in a property downturn when acquirers, such as SOEs and asset management firms, are demanding better valuations and sellers are not willing to dispose at a deep discount.” 

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One policy tool being used to revive the housing market and the broader economy is interest-rate cuts. In a surprise move, the People’s Bank of China on Tuesday made the steepest cut in three years on the rate on its one-year loans. The central bank has also encouraged lenders to lower mortgage rates, Jingyang Chen, Asia FX strategist at HSBC Holdings Plc, said earlier this month. 

As of June, 100 out of 343 Chinese cities have lowered the rate floor of new-home mortgages or removed the minimum required, the PBOC said in its quarterly monetary policy report on Thursday. That has brought the nation’s average mortgage rate to 4.11% in June, down 0.51 percentage point from a year earlier.

–With assistance from Irene Huang.

(Updates with interest-rate cuts in the last two paragraphs)

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