China property sales will continue to fall this year, adding to debt pressures on local governments and weaker banks: Moody’s

China property sales will continue to fall this year and weakness in the housing market will exacerbate debt pressures on local governments and weaker banks, according to a report by Moody’s Investors Service.

The international credit rating agency said on Wednesday that the mainland property sector – still teetering under a mountain of unpaid debts, unfinished homes and stagnant sales – will remain soft this year, with negative effects on local government finances.

“Our base case is that property market weakness will persist in 2023, and that the sector’s contribution to the economy will remain materially lower over the next few years than in the past decade,” said Martin Petch, vice-president and senior credit officer at Moody’s.

A prolonged fall in home sales and prices could have serious consequences for local government financing vehicles. That would add pressure on local governments, which saw debts jump 15 per cent to 35 trillion yuan (US$5.12 trillion) last year, according to data released by the Ministry of Finance in January.

Weaker banks are also exposed to property-related loans, and although this is unlikely to trigger systematic banking problems, the central government may need to offer more support, Moody’s said in the report.

“China will experience a difficult transition as the property sector is unlikely to regain its role as a major growth driver,” Petch said in the report. “These risks could be triggered and magnified by policy missteps and would add to elevated public sector debt.”