Dagong Credit Flash Chinese Property Industry Chinese Cities Credit Risk Ranking Update Summary Category Industry Outlook Location China Industry Real Estate SIC 9111 Outlook Stable Date 04/29/2016 Dagong HK affirms a stable outlook on the Chinese property industry.we also updated a credit risk ranking among 35 major Chinese cities and found overall credit risk improvement although risk varies from city to city in the coming oneyear period. Our stable outlook reflects the following factors: Our expectation of sustainable GDP growth in China, mainly resulting from recovering large-scale industrial and trade sectors. Chinese property market will grow in tandem with China s GDP growth rate, in our view. Plenty of Chinese government policy tools to support the recovery of the real estate industry. In the near term, we see the major policies play a key role in the sector. Accommodating Monetary Policy People s Bank of China s loosening monetary policy continues to inject abundant liquidity into the economy. Chinese banks accommodative consumer credit support and local governments involvements in real estate will also help promote property sales growth in sales volume. Land Supply Reduction The launch of Destocking policy by the Chinese government has reduced supply in the real estate sector since 2015 in order to manage a soft landing economy. The relevant measures, in effect, suppressed the urges of land sales by local governments. Consequently, the land supply declines (and land oversupply eased). Contacts Zhou Feihua Deputy Rating Director (852) 3192 7090 Feihua.Zhou@dagonghk.com According to China s Ministry of Land Resources, the accumulative real estate land supply among the Tier-1 cities decreased by 8.3% YoY for the first eleven months of 2015, while Tier-2 and Tier-3 & 4 cities also experienced a drop by 35.9% and 34.3% during the same period, respectively. Reduced land supply stabilizes housing prices, especially in the city centers of provincial capital cities. Stabilizing housing prices have given rise to consumer confidence and rising sales volume, in our view.
Chinese Property Markets Credit Risk Ranking Update: Inside China, Dagong HK has launched a study of the 35 major Chinese cities in terms of credit risk resulting from the real estate sector 1 starting from 27 May 2015. (Please refer to Dagong Credit Monitor on Chinese Property Market & Developers for the details of our analytical framework). Considering China s large geographical area, it is difficult to gauge the risk of real estate bubbles nationwide. As a result, we designed the study to guide investors where the bubble risk pockets are in China. Our credit risk analysis of the property markets in 35 major Chinese cities and municipalities is based on the current industry data. Our proprietary analytics framework ranks these cities by 5 risk bands of credit risk emanating from the property market ( Very High Risk ; High Risk ; Medium Risk ; Moderate Risk ; and Low Risk ). We classify each risk band through the Supply/Demand Balance Index 2 in both housing and land markets. The higher the index, the higher the credit risk for the corresponding housing/land market(s). For example, the city (with the high index) may have experienced declining property demand which fails to meet housing and/or land supply. Overall, the summary for the 35 Chinese cities view as follows 3, 5 cities fall in a Low Risk band after the inclusion of Nanjing, almost from first-tier cities (namely Beijing, Shanghai, Guangzhou, Shenzhen and Nanjing) and 14 cities in Moderate Risk band. 8 cities fall in a Medium Risk band. 2 cities fall in a Very High Risk band with the reclassification of Hefei and the remaining 6 cities in a High Risk band. In our opinion, county-level and Prefecture-level cities have a higher credit risk than provincial cities in general. Here are the detailed observations for the 35 studied cities (EXHIBIT 1& 2): Real estate bubble risk in Cities in Low Risk and Moderate Risk bands has reduced noticeably. Gross floor area has risen over 20% YoY in many of the cities while some cities achieved an increase of 30%-40%. Considering the strong growth momentum of housing prices in those cities, the near-term credit risk would be lower and insignificant long-term credit risk, in our view. Near-term real estate bubble risk of the cities in High Risk and Very High Risk bands has declined but we believe the risk remains high in medium to long-term, depending on the policies on real estate. Since the growth momentum of housing prices in those cities is not expected as strong as cities in Low Risk and Moderate Risk bands, thus, a downward pressure of housing prices remains likely. 1 The study is not based upon Dagong HK s existing credit rating methodologies and does not represent our overall credit view of the Chinese cities in this study. We do not rate any of the studied cities. 2 Supply/Demand Balance index is a ratio of supply statistics (e.g. land supply) to demand statistics (e.g. population). 3 Please refer to the 2016 Credit Risk Rankings for the 35 Chinese Cities Property Markets See Exhibit 2 2
Nanjing was moved to Low Risk band from Moderate Risk band, thanks to Nanjing s limited land supply, moderate growth in real estate investment, and healthy local economy. Hefei was lifted from a Very High Risk to High Risk band because of a reduction in housing supply. Changchun was lifted from a High Risk to Medium Risk band due to a slight reduction in both newbuilt and land supply. We note, however, that Changchun still faces pressure from excessive land supply problem despite the improvement. Guiyang and Shenyang remain in a Very High Risk band. However, the land oversupply in Shenyang has gradually eased, and the property demand has risen. If the situation continues, Shenyang will be expected to move out from the Very High Risk in the next 2 years. We will keep an eye on the progress of urbanization and demand/supply dynamics of real estate sector, which are the fundamentals of our view credit risk of China s property market. The overall progress of reforming financial mechanism (e.g. transfer payments) in China will be taken into consideration as well. We have also incorporate our concerns for the rising level of government debt, RMB depreciation against major currencies, and declining profit margin of the domestic industrial sector which affect the credit environment adversely. 3
EXHIBIT 1 Dagong HK s Econometric Model Measures Risk on 35 Chinese Cities Property Markets Source: Wind, Dagong HK 4
EXHIBIT 2 2016 Credit Risk Rankings for the 35 Chinese Cities Property Markets Risk Band City City in Chinese 2016 Risk Ranking 4 Ranking +/- versus Prior Year Shenzhen 深圳 1 - Low Risk Moderate Risk Medium Risk High Risk Very High Risk Source: Wind, Dagong HK Shanghai 上海 2 - Guangzhou 广州 3 - Beijing 北京 4 - Nanjing 南京 5 +1 Lanzhou 兰州 6 +2 Chengdu 成都 7 - Urumqi 乌鲁木齐 8 +1 Ningbo 宁波 9 +1 Tianjin 天津 10 +1 Haikou 海口 11 +2 Nanning 南宁 12 - Hangzhou 杭州 13 +1 Jinan 济南 14 +1 Xi an 西安 15 +1 Taiyuan 太原 16-11 Shijiazhuang 石家庄 17 +1 Xining 西宁 18 +1 Nanchang 南昌 19-2 Wuhan 武汉 20 - Qingdao 青岛 21 - Harbin 海尔滨 22 +1 Xiamen 厦门 23-1 Changsha 长沙 24 +4 Fuzhou 福州 25-1 Zhengzhou 郑州 26 - Changchun 长春 27 - Dalian 大连 28-3 Chongqing 重庆 29 - Hohhot 呼和浩特 30 +2 Kunming 昆明 31 - Yinchuan 银川 32-2 Hefei 合肥 33 +1 Shenyang 沈阳 34-1 Guiyang 贵阳 35-4 The higher the ranking, the lower the risk, i.e. city ranked No. 1 has the most moderate risk, city ranked No. 35 has the highest risk 5
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