Distress in the Chinese property market that persists beyond Fitch Ratings’ base-case assumptions could lead to the various effects extend beyond the property sector’s immediate value chain, Fitch Ratings says.
Our analysis shows that the Standalone Credit Profiles (SCPs) of companies in three sub-sectors – asset management companies, privately owned engineering and construction companies and smaller steel producers – are the most vulnerable.
The majority of sub-sectors would be susceptible to a medium level of second-order impacts under our stress scenario, but vulnerability in standalone creditworthiness lies between low and medium.
Nine sub-sectors would see low second-order impacts. These are non-cyclical or involve issuers with conservative balance sheets that limit exposure to property distress and slower economic growth. Five of these also have high headroom in their SCPs.
Many government-related entities (GREs) and regional government agencies benefit from ordinary government support that underpins their SCPs, helps alleviate external shocks and supports high rating headroom. Therefore, we expect only low-to-medium rating pressure on most GREs and agencies, even though some, such as engineering and construction companies owned by local-government shareholders, various levels of local and regional governments (LRGs), and local government financing vehicles (LGFVs) for urban development would face high second-order disruptions from prolonged property-market distress.
Under a stress scenario, the authorities may rely on the public sector and financial institutions to support the economy, leading to additional risks and higher leverage at these institutions.
The focus of our analysis was not on issuer default ratings (IDRs) and does not predict rating actions. In many cases, IDRs benefit from our expectation of extraordinary support that would insulate them from the impact of the scenario.
