Risk of default by Chinese real estate companies is increasing - mainly manifested in private real estate companies with high leverage and low operating efficiency
China Housing Finance Development Report 2021
"Strengthening Credit Risk Prevention and Control and Better Serving Housing Consumption" and "China Housing Finance Development Report (2021)" (hereinafter referred to as "Report") hosted by the National Finance and Development Laboratory (NIFD) on October 10 Held in Beijing. The "Report" is the third in a series of annual reports released by the NIFD Real Estate Finance Research Center. It consists of three parts: "Comprehensive Chapter (General Report)", "Market Chapter" and "Special Topics". The report has now formed a research framework covering the macro, medium and micro fields of real estate and real estate finance, covering the analysis of the development status of the primary and secondary markets of housing finance and the topical research on market hotspots. It is a relatively comprehensive and authoritative research on housing finance in China. report.
Li Yang, member of the Academy of Social Sciences and chairman of NIFD, said at the meeting that real estate, finance and macroeconomics are closely related. The economic cycles of major countries in the world are all related to the real estate cycle, and most of the major economic crises are real estate crises or real estate financial crises. , We need to always be vigilant about the real estate market.
Liquidity is the most fragile nerve of the modern financial system. At present, the risk of default by Chinese real estate companies is increasing, which is mainly manifested in private real estate companies with high leverage and low operating efficiency. The risks are concentrated on liquidity risks. Real estate companies that have always been known for their high gross profit margins frequently default on debt. On the one hand, the fundamental reason is related to the real estate companies' own operations, and on the other hand, it is also related to external factors such as the new crown epidemic Covid 19 and tightening control policies.
The internal reasons for the debt default risk of real estate companies include poor operating efficiency and longer housing inventory turnover days, resulting in low accounts receivable turnover ratio and deterioration of cash flow; high leverage operation, high debt leverage, disorderly expansion and low operating efficiency combined to lead to high short-term liquidity risk and so on. External reasons include three aspects:
First, the impact of the Covid 19 has led to accelerated differentiation of real estate companies;
Second, the impact of real estate control policies. As the Covid 19 is brought under control, the real estate bubble is re-emerged. An important measure taken by local governments to control the bubble is to limit the price of new houses. In 2018, the land market was hot, the cost of acquiring land was high then, but now the selling price limit and other high cost factors make the real estate enterprises' profitability humble;
Third, under the influence of the prudential system of real estate finance, the financing of real estate enterprises has become more tense.
The recent volatility in the real estate industry has also affected the performance of private enterprise real estate bond prices. After July, the price of real estate bonds of private enterprises adjusted rapidly, mainly due to the following factors:
First, the short-term industry sales data tends to be underperformance due to multiple factors;
The second is the weakening of belief in "too big to fall";
The third is investors’ concerns about the authenticity of financial statements;
Fourth, the loss of liquidity of some assets makes it difficult to distinguish between liquidity risk and insolvency risk;
Fifth, the negative feedback effect of credit bonds itself is relatively strong, and investors' risk aversion has intensified.
Currently, the housing market is transforming from an incremental market to an "Housing Inventory Market"; there should be annoyances in the financial services of "Housing Inventory" transactions:
First, the security of transaction funds is not guaranteed;
Second, the supply cycle of financial services is long;
Third, financial service costs become high, and emerging of arbitrary fee.
Housing consumption is inseparable from financial support, but it also needs to adhere to the country’s basic guidelines for maintaining the healthy and sound development of the real estate market, uphold the bottom line of prudent risk management, reduce costs as much as possible, and adhere to reasonable financial service rates; at the same time, financial services should not support the speculative demand for housing investment and it must play a positive role in the prudent management of real estate finance.