Goldman Sachs Bear on Chinese Real Estate, Expects More Defaults Ahead

Chinese real defaults have reached to such extent that Goldman Sachs analysts have shifted to their worst-case scenario for the riskiest part of the market.

Accordion to the bank’s report, twenty-two China high-yield bond issuers, all related to the property sector, have either defaulted on their U.S. dollar-denominated bonds or deferred repayment with bond exchanges since the start of this year.

“Given the pick up in stresses, we raise our FY22 China Property HY default rate forecast to 31.6% (from 19.0% previously), which was our previous bear case assumption,” the bank said.

They also raised their estimate for the Asia high yield corporate default rate to 15.5%, up from 9.3% previously, since Chinese property dominates the category. The new forecast is slightly lower than the 17.8% default rate last year, according to the report.

According to Moody’s estimates, real estate and related industries account for more than a quarter of China’s economy.

“We are unlikely to see a broader recovery in China Property HY until property sales begin to show signs of a rebound,” the Goldman  wrote in a separate report Friday.

“We believe further easing measures are likely required before property sales can recover, particularly with Covid restrictions in place across a number of cities in China,” they said, noting they expect stronger developers will perform much better than weaker ones in the current environment.