Vidya Ranganathan and Samuel Shen

SHANGHAI/SINGAPORE, (Reuters) – Third quarter earnings for China’s property and ancillary sectors show Beijing’s clampdown on rampant borrowing is causing pain that goes beyond the China Evergrande Group. This could lead to the authorities easing policy.

Although Evergrande’s debt crisis is not as severe as many had feared it would, the health of China’s property sector (which has a $5 trillion value) is putting Beijing under pressure to continue with structural reforms.

Ronald Chan (Hong Kong, Asia Head of Equities, Manulife Investment Management) said, “Evergrande’s not too large to fail. But the sector is.”

“Any potential negative impact that this has on China’s property market prices will be devastating.”

According to quarterly reports, seven of the 10 top-ranked developers in China by revenue suffered sharp declines during the period July-September. These include China Vanke Co, Greenland Holdings Corp and Greenland Holdings Corp.

Greenland saw its earnings drop 27%, while Vanke’s profit dropped 23% from a year prior. Risesun Real Estate Development’s profit tumbled 61%.

The list doesn’t include Hong Kong-listed Chinese developers including Evergrande, Country Garden Holdings, or Guangzhou R&F Properties, which don’t need to disclose third-quarter results under local rules.

Citic Securities also tracks 20 Chinese-listed developers. This list includes companies such as Gemdale Corp or Yango Group. It shows a lower margin, shrinking cash stacks and increasing balance sheet risk.

Slowdowns in other areas of the economy have been caused by tough measures taken this year to temper a market that was frothy. This included loan curbs, land price caps, and land sale restrictions.

According to Changjiang Securities, this is a reflection of the collateral damage. China’s listed manufacturers of cement, glass, and home furnishings saw an average 7% drop in profit for their third quarter.

Suzhou Gold Mantis Construction Decoration Co., a large building decoration company, suffered a 52.6% decrease in net profit and 31% drop in sales. Evergrande is a client of the company. The firm said that it was actively seeking the $4.3 billion ($672,000,000) receivables from the developer.

Property market woes “impact the real economy more than the financial markets, where prices were quickly adjusted to prevent wider contagion,” said Wei Yao, chief economist for APAC & China at Societe Generale (OTC:) Corporate and Investment Banking.

Her words were: “What we see is more of a slow motion correction rather than an urgent crisis.” This will likely lead to China experiencing a longer and deeper slowdown, without any stimulus.

China’s financial regulators asked banks to not overreact when implementing property loan curbs. This is after China, which has the second largest economy, grew 4.9% in its third quarter. It was the slowest growth in one year.

People’s Bank of China has used targeted easing. This keeps cash conditions and rates stable since the 2020 coronavirus pandemic.

Some economists argue that there is more need for support from policy.

Soochow Securities’ economist Ren Zeping urged this week the government to lend a helping hand as the economy struggles amid credit tightening, property market stagnation and increasing raw material prices.

Yao from Societe Generale said that China needs to further reduce its financing costs. He suggested that banks should keep a smaller amount of money as reserves and benchmark rates to help prevent China’s economic growth falling below 4% in 2022.

According to her, “Chinese policymakers can tolerate a deeper slowdown to progress with structural reforms.” But it is a delicate balance. You could end up unable to lend your assistance in time.