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November 7, 2016

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Moody’s: Stable outlook for China property sector

CHINA’S property sector is stable, as the regulatory tightening measures implemented so far this year are not expected to result in dramatic declines in sales over the next six to 12 months, according to Moody’s Investors Service.

“We expect the three indicators that we use to determine the China property outlook — national sales growth, inventory levels and market liquidity — to remain within the parameters for a stable outlook over the next six to 12 months,” said Moody’s vice president and senior credit officer Kaven Tsang.

“While residential property prices in major cities have surged rapidly since late-2015, along with strong end-user demand and an increased level of investment appetite, we do not expect a dramatic decline in sales prices and volumes in these cities during the outlook period, notwithstanding the latest round of regulatory tightening aimed at reining in the rapid rise in prices,” added Tsang.

“We expect the government will continue to balance its desire to keep price growth in check with its target of maintaining a stable property sector to support economic growth,” said Cindy Yang, an analyst at Moody’s.

“Also, despite an expected slight tightening in mortgage financing, mortgage availability and loose monetary policies will remain broadly supportive of the sector,” Yang noted.

Moody’s conclusions are contained in its newly released report “Property — China: outlook is stable; rising risk of slower sales from tighter controls”, which is co-authored by Tsang and Yang.

Moody’s expects the growth in nationwide contracted sales — in terms of sales value — to be flat or slightly negative in 2017, against an estimated high base of around 25 percent year-on-year growth for 2016. Specifically, Moody’s expects sales volumes will decline slightly due to the recent tightening measures implemented in major cities in September and October 2016, but for this decline to be partly offset by a moderate rise in prices, given low inventory levels.

Currently, around 20 cities have introduced tighter criteria for home purchases and/or mortgage lending in efforts to curb the rapid rise in residential prices. These cities accounted for about 40 percent to 45 percent of nationwide contracted sales in the first eight months of 2016.

However, Moody’s notes that the measures implemented this year have not been as severe as those that caused the previous down-cycles in 2011 and 2014.

Moody’s further notes that onshore liquidity will remain at healthy levels, although banks will remain selective and focus on lending to large developers with healthier financials and on first-time buyers and upgraders.

In Moody’s view, the government will likely further tighten its measures if prices surge in major cities in 2017, thereby increasing the risks of a market correction and, in turn, negatively affecting developers’ sales and cash flows.

Since June 2016, the number of positive rating actions has outnumbered negative actions. The proportion of rated developers with negative outlooks peaked in the first half of 2016 and declined to 34 percent as of 28 October from 44 percent in early-May.

Moody’s expects the negative bias will continue to decline modestly in the next six to 12 months against our expectation that certain rated developers’ credit profiles will improve moderately, supported by strong contracted sales and revenue recognition, stabilizing profit margins, and lower funding costs.


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