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Morgan Stanley upgrades China property despite default fears


China: Beijing’s pedestrian crossing a road.

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Morgan Stanley has upgraded China’s property market to “attractive,” while concerned investors watch closely to assess if it is debt-saddled. Evergrande might default, whether there will be contagion

According to the U.S. Investment Bank, policy relaxation in the property sector is a possibility Looks like the economy will start to improve, which should help Chinese real estate stocks.

Elly Chen (equity analyst, bank) stated that default risks and weakness in the property markets have been heavily priced into stock property. This was according to a Oct. 10 note. Policy easing is more probable now, as property stocks are likely to react.

We believe systemic risk can be managed by property stocks.

Elly Chen

Morgan Stanley equity analyst

Chen admitted that there have been “many defaults” since 2020, and an escalating threat of a major default by a developer in 2021. This “adjustment proces” to reduce debt and to implement policies that “manage system excesses,” Chen wrote, will probably continue for six to twelve more months.

Chen stated that property stocks price in part of the risks and she believes systemic risk can be managed.

China’s property developers are growing rapidly after years of debt. Authorities introduced the “three redlines” policy in January to address this problem. The policy establishes a maximum amount of debt that can be used to limit a company’s cash flow, assets, and capital.

After the restriction of developers, things came to an abrupt halt.

Evergrande, the world’s largest developer and most indebted, has warned twice that it may default last month. The company has not paid interest on five bonds offshore, which were due September and October.

Rating agencies also exist downgraded other Chinese property developersan increase in default and liquidity risks

An approaching ‘inflection moment’ in the policy process

Morgan Stanley however stated that a “policy Inflection Point” is near.

Analysts believe there could be “potentially upcoming easing actions” as policymakers will likely further relax mortgage quotas. they have been trying to boost bank loans

This year’s slowdown in home purchases has been caused by curbs implemented in Chinese cities, including restrictions on home purchasing.

Chen stated that policy is the best indicator of property stock values.

CNBC Pro provides more details about China

Morgan Stanley estimates that China’s Gross Domestic Product is 6.5% dominated by property investments and 7.3% of it by property-related service. According to Morgan Stanley, a 10% decline in residential property investment could slow down the country’s GDP growth by approximately 1%.

Chen explained that “further spillover” could be in the form of a negative income effect, which would dampen private consumption. Chen also stated that the policymakers are likely to provide “meaningful easing” to stabilize and support the economy.

Morgan Stanley reports that most developers will meet the “three Red Lines” criteria by 2022. According to Morgan Stanley, the three red lines limit debt relative to cash flow, assets, and capital.

The bank covered 16 out of 26 developers in the first half 2021. Nine of them met only two criteria. According to the bank, only one developer failed to satisfy all three criteria.

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