At Least One Credit Rating Agency Gets More Pessimistic About China

At least one credit rating agency gets more pessimistic about China.

Commentary.

Throughout much of the past year, economic and financial analysts at S&P

global ratings anticipated what could be described as a gradual

improvement in China's troubled economy.

But the flow of data and the implications of Beijing's policy choices

have recently led to a more pessimistic assessment.

The primary source of pessimism is unsurprisingly the country's property sector.

With the failure of the giant developer Evergrande, China fell into a property crisis

that has persisted for almost five years.

There was some hope that matters were working themselves out early in 2025.

S&P brightened its outlook, forecasting a property sales decline of only 3% for the year,

a considerable improvement over 2024, which saw a sales decline of 12.9%,

but the improvements of early 2025 dissipated as the year progressed.

By October, S&P analysts reduced their sales forecast for the year to an 8% decline.

Things got so weak by the end of the year that these analysts settled on a 12.6% decline,

bringing sales to 8.4 trillion yuan, less than half the 18.2 trillion yuan figure in 2021

when the crisis began.

Reinforcing the pessimistic turn was the continued decline in real estate values

and the adverse impact on Chinese household net worth and consequently consumer confidence.

Earlier in the year, Shanghai reported a modest uptick in residential real estate prices,

which had informed the earlier optimism, but by year's end,

price declines in Beijing, Guangzhou, Xinjiang, and elsewhere brought down the average.

The year saw a price drop of more than 8% compared to 2024.

From this less than encouraging backdrop,

analysts at S&P now look for residential real estate sales to decline between 10 and 14% in 2026,

a slightly worse slide than in 2025 and extending the overall drop since 2021 to almost 60%.

S&P does not offer a forecast of residential real estate prices,

but facing such a sales decline.

It is hard to see residential real estate values doing anything but falling further,

causing more harm still to household net worth and the confidence of Chinese consumers,

considering the agency's obligation to rate the credit and prospects of property developers

and China generally. The analysts working on this project have hinted at credit downgrades.

They have identified four of the 10 largest developers as likely to suffer a downgrade,

excluding Chinawank, which last year asked to delay repayment of some of its debt.

The fault for these lasting, indeed worsening problems lies, S&P ratings explains

at the feet of policymakers in Beijing. Direct steps to mitigate the downward pressure

of this crisis have been inadequate. To be sure, the authorities have implemented policies to

buy excess properties and encourage lending to developers. But all these measures fall short

next to the size of the sector. And what is more, the help has come only after a significant delay.

This conclusion should come as no surprise to regular readers of this column.

What is more, Beijing, rather than supporting this important sector and Chinese consumers,

has instead doubled down on promoting high-tech production capacities. Even an enlarged technology

sector is far from enough to counterbalance the economic drag of the failing property sector.

In the meantime, S&P points out the high-tech expansion has proceeded to a point where China now

produces more than its domestic economy can absorb, making the country more export-dependent

than ever at a time when the United States and other Western countries are becoming

increasingly hostile to China trade. This point, too, should come as no surprise to regular readers

of this column.