Chinese economy impacted by debt issues of property developers

24 Dec 2021 CW Team

Debt issues at a major Chinese property developer have now started affecting the country’s steel sector and began to ripple through to other vital parts of the world's second-largest economy.

The spreading balance-sheet crisis at real estate companies is a warning for policymakers as a change in the fortunes of the steel sector would have notable repercussions for China's economy, with glass, cement and household appliances all vulnerable to demand drops.

Steel costs have decreased from their record highs seen earlier in 2021 due to easing demand from development activities, which account for more than half of the metal's consumption, while steelmakers' share costs have also been impacted.

Steel's acute sensitivity to the ebbs and flows in development and manufacturing makes it a closely-tracked bellwether for China's economy, which has begun to slow down from the second quarter. Steel companies are huge employers that help an extended supply chain. Hitting steel works, real estate developers have dialled back investment in projects to save cash in a sector packed by tighter borrowing rules that have engulfed indebted firms, most notably China Evergrande Group. They usually stockpile steel products in winter at relatively lower costs and sell them after the new year holidays when consumption resumes.

In the final quarter of 2021, the real estate market took a further hit as the unease in the sector shook already weak buyer sentiment, with unsold residential stock in China's 100 biggest cities touching a five-year high in November.

Demand for houses is likely to ease further in 2022, hitting downstream producers of household products. Cement manufacturing, another construction material, decreased by about 16% for September-November year-on-year and was lower versus the same time between 2017 and 2019.

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