wealth distribution

Analysis | How to Tell If China’s Property Clampdown Has Peaked

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China’s property sector expanded rapidly as the country’s economy became more market-oriented, in part because the emerging middle class viewed buying a home as one of the few safe investments available. Home prices skyrocketed, fueling speculation and more demand. Authorities encouraged development which helped meet the nation’s ambitious gross domestic product targets. Debt piled up as Chinese builders kept going back to refinance. For years, China has tried to defuse the growing debt bomb amid fears it could set off a disastrous financial meltdown. In 2020 it tightened financing rules for private developers with the aim of reducing reckless borrowing. But many developers don’t have enough available cash to cover their liabilities. Soon a liquidity crisis at one of the biggest, China Evergrande Group, led to defaults and fears of contagion that have reverberated throughout the industry and the wider economy. 

2. What’s the government doing?

Government efforts suggest state-run firms will come to dominate the market and the days of heady debt-fueled expansion by private developers is over. A key solution to private developers’ liquidity woes, for instance, is the acquisition of assets by larger state-owned enterprises. Agile Group Holdings Ltd. and Shimao Group Holdings Ltd. both announced sales this year of stakes in companies to SOEs to raise cash. Enlarging the state’s influence would provide greater stability and limit the risk of financial fallout. At the same time, China has sought to cool ever-rising prices as part of President Xi Jinping’s “common prosperity” campaign to address the country’s persistent wealth gap. The idea of imposing a nationwide property tax was revived to deter speculators and plans were announced to build millions of low-cost rental housing units by 2025 as it seeks sustainable alternatives to the slumping property market.

Why China Could Be Serious About a Property Tax Now: QuickTake

3. Are there other ways to raise cash?

China plans to issue national guidelines to make it easier to tap cash in escrow accounts from home presales, Chinese media including 21st Century Business Herald and the Securities Daily reported in February. Developers would be able to use some of those proceeds after setting aside the amount required for project building, the reports said. The standardized regulation would replace legions of local rules, some of which are considered overly restrictive. That could boost liquidity substantially at a time when developers are collapsing under funding stress.

4. Why could that be a game changer?

Easing access to escrow cash would free up a significant chunk of capital that developers could use to meet their debt obligations. Presale proceeds from homebuyers are the largest single source of liquidity for real estate firms, making up about 37% of their funding. Restrictions on these funds means that cash from sales at a project level cannot be transferred to other parts of its business, and implementation these of rules is stricter in some cities. Limited access to this channel of funding has already played a critical role in debt crises at Fantasia Holdings Group Co. and Kaisa Group Holdings Ltd. which later defaulted on their bonds. 

5.  What about monetary policy?

China’s central bank already cut three of its policy rates in January, though at 10 basis points the reductions were small. Banks also lowered the five-year loan prime rate which serves as the basis for mortgages. That reduction was even narrower at just 5 basis points, disappointing investors at the time. Most analysts and economists agree more monetary easing is needed, especially if falling home prices take a toll on already-fragile consumer sentiment. Property comprises as much as 40% of household assets by some estimates.

6. How to tell if it’s working?

• China’s property sales slump worsened in February, with the 100 biggest companies in China’s debt-ridden property industry seeing a 47% drop in sales from a year earlier. Proceeds from home sales including presales generally make up more than half of developers’ cash inflows, according to calculations based on official data. Long-term household loans, a key proxy for mortgage loans, grew by the slowest amount since February 2020.

• The offshore market remains largely closed off, with the yield on Chinese junk bonds prohibitively expensive at 19%. Only one of China’s top 20 developers by sales, Greentown China Holdings Ltd., sold a dollar bond in January, compared to at least seven in the previous period last year, Bloomberg-compiled data show. Sales of dollar notes in the second half of 2021 fell 49% to $14.7 billion compared to the previous year as concern over contagion from Evergrande flared.

Why China’s Developers Have So Much Dollar Debt: QuickTake

• The onshore market doesn’t show a much better picture for private developers. Last year, local bond sales by such firms fell 39% to 190 billion yuan ($29.9 billion). The situation is very different for state-owned developers. They sold 315 billion yuan of local bonds, up 12% from a year earlier, to overtake private peers for the first time in seven years.

• Authorities in December eased limits on borrowing by major property firms used to fund mergers and acquisitions, which may make it easier for state-owned companies to acquire assets being sold by weaker developers. Regional lender Shanghai Pudong Development Bank Co. sold a bond to help fund loans for M&A in the sector, and at least three other banks and three developers planned or sold similar notes this year.

What China’s Three Red Lines Mean for Property Firms: QuickTake

• Property firms have $40 billion of local and offshore debt maturing in the first half of the year. But concerns have mounted about the transparency of some troubled developers. Evergrande, Agile, Kaisa Group Holdings Ltd. and Fantasia Holdings Group were found to have opaque liabilities that may or may not be reflected on their balance sheets, making it hard to assess true credit risks. Guangzhou R&F Properties Co. was downgraded to restricted default by Fitch Ratings in January after it completed what the Fitch considered a distressed debt exchange.

Why Hidden Debt Is a Big Problem for China Developers: QuickTake

• More developers are turning to the equity market as an alternative channel to raise cash this year, but the result typically triggers a sharp selloff. Valuations for developers remain low in the equity market, trading at less than 0.3 times book value, and about 2.3 times earnings on average. Because new stock is typically sold at a discount to market, low multiples mean developers would need to sell plenty of new shares to raise a meaningful amount of cash.

• While bank loans remain available for some developers, lenders have become much more selective as they tried to limit exposure to the real estate sector. Their preference for state-owned borrowers makes it hard for private, weaker developers to access credit lines.

• The shadow banking sector, including the $3 trillion trust industry, had provided an alternative for lenders shunned by banks. But it has shrunk in recent years amid government efforts to curb hidden debt. The property sector’s net financing from trusts was negative 236.9 billion yuan last year, according to a CICC report. Moody’s expects outflows to continue this year as authorities maintain their tight regulatory oversight.

A Guide to China’s $10 Trillion Shadow-Banking Maze: QuickTake

• More QuickTake explainers on why China’s defaults are more alarming, why the developers have so much dollar debt, and what the three red lines are.

• Bloomberg Opinion’s Matthew Brooker on the…

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