Chinese stocks could plunge by 20% if real estate troubles get much worse, Morgan Stanley says

BEIJING — China’s struggling actual property sector may considerably drag down the financial system and the inventory market if authorities do not present sufficient assist, Morgan Stanley analysts mentioned in a report Wednesday.

The Shanghai composite has fallen by greater than 12% to date this yr. Several economists have slashed their China GDP forecasts to close 3% or much less this yr as Covid controls and the property stoop weigh on progress — formally focused at round 5.5% this yr.

This summer season, rising anxiousness amongst homebuyers about residence completion introduced issues within the large actual property sector — and worries about spillover to the remainder of the financial system — to the forefront once more.

The Morgan Stanley analysts usually count on the Chinese authorities will shortly try to rescue the property trade, together with a “sizeable” fund to assist builders end establishing residences. That would enable housing gross sales and costs to stabilize within the second half of this yr, the report mentioned.

But if such a fund is simply too small and different measures stay restricted, the analysts are much less optimistic concerning the influence on China’s financial system and shares.

Here’s how dangerous they assume issues may get below a “stress-test scenario”:

• Chinese inventory indexes may plunge by one other 20% from present ranges over the subsequent six to 12 months — and doubtlessly stay decrease for for much longer if the hypothetical stress state of affairs persists.
• China’s GDP may gradual drastically, averaging 2% progress in 2023.
• More than 11 million folks may lose their jobs, probably sending the city unemployment charge above 7%. Construction, lodging and catering would see probably the most job cuts.

The Chinese authorities has but to announce publicly any type of large-scale fund to assist actual property builders in finishing residences.

On Wednesday, Premier Li Keqiang headed a gathering that did emphasize assist for making certain supply of properties by saying native governments ought to take a versatile strategy in offering particular credit score insurance policies and particular lending.

The Morgan Stanley analysts described coverage easing to assist housing demand as “the most aggressive since 2016” and identified native governments’ efforts to handle unfinished homes.

“The silver lining is that the spillover [from real estate] to the rest of the economy remains manageable so far,” the analysts mentioned. But they warned the housing market’s dimension and “the momentum that has gathered” make it unclear whether or not current measures are sufficient.

Even if the Chinese authorities can stabilize the housing market, an getting old inhabitants is predicted to scale back demand for residences, placing the nationwide actual property trade on a downward path.

Morgan Stanley’s base-case forecast expects long-term demand for housing to say no by 30% between 2020 and 2030.

That would lead to a ten% to fifteen% drop in demand for development supplies and housing-related purchases equivalent to giant house home equipment, the report mentioned.

Overall, a slowdown within the residential property market will drag down GDP progress by 0.1 proportion factors a yr, in distinction to including 1 proportion level to progress yearly over the past twenty years, the analysts mentioned.

Previously, China’s actual property market had boomed for twenty years, leading to speculative conduct and elevated dangers for long-term financial progress. Housing gross sales worth grew by roughly 20% a yr to 18 trillion yuan ($2.65 trillion) in 2021, or one-sixth of GDP, in line with Morgan Stanley.

Among many penalties was that the ratio of family debt to GDP soared from 17% in 2005 to 62% in 2020 — just like the extent in main developed economies, the report mentioned.

Beijing within the final a number of years began to advertise a mantra of “houses are for living in, not speculation.” About two years in the past, authorities cracked down on builders’ excessive reliance on debt for progress.

By the second quarter of this yr, housing gross sales worth was 40% beneath the height on a seasonally adjusted, annualized foundation — a drop of 8 trillion yuan, the Morgan Stanley report mentioned.

The near-term outlook stays grim.

“The Covid lockdowns in 2Q22 exacerbated the housing downturn, by disrupting product completion, delaying debt restructuring meetings, while also weakening future income expectations,” the analysts mentioned.

Earlier this week, Chinese developer Country Garden described the property market has having “slid rapidly into severe depression.”

— CNBC’s Michael Bloom contributed to this report.