March 28, 2023

Why doesn’t China save its real estate industry?

Many Chinese developers have suspended or delayed construction of pre-sold apartments due to cash flow problems. In this photo, a real estate construction site in Jiangsu province, China, 17 October 2022.

Future Publishing | Future Publishing | Getty Images

BEIJING – China’s central government is unlikely to spend billions to bail out its struggling real estate sector, even as foreign investors hope for a massive bailout, analysts said.

A year after the Chinese developer Evergranden’s debt problems started to blow investors away, the country’s real estate problems have only gotten worse. Some homebuyers refused to pay their mortgages due to construction delays, while property sales plummeted. Once healthy developers are also having trouble paying their debts.

“I doubt the government will directly bail out property developers, although they may still be asking banks and [state-owned enterprises] to help selected struggling developers,” said Tommy Wu, Commerzbank’s chief China economist.

He expects Beijing to want to gradually solve the real estate sector’s problems and reduce the sector’s role in the economy. Real estate and related sectors make up about a quarter of China’s gross domestic product.

“New measures in the coming weeks and months will likely continue to focus on supporting housing completions and promoting housing sales,” Wu said.

S&P Global Ratings said in September that it estimated the property market needed 700 billion yuan ($98.59 billion) to 800 billion yuan “to ensure that distressed developers can complete the homes sold.”

A state fund of similar size has not yet been announced.

This is despite the funds suggested by multiple source-cited reports. Some investment analysts are waiting for such a fund, especially one large enough to inspire confidence.

Many developers are already facing financial difficulties.

Total reported debts Evergrande, Kaisa and Shimao was more than 2.6 trillion yuan in mid-2021, after which the financial problems of the three developers worsened. They make up only a part of the industry.

At that scale, even if the central government spends hundreds of billions of yuan, it would have little effect, said Qin Gang, executive director of the China Real Estate Research Institute ICR.

We don’t expect a bailout of struggling developers, while a “market-driven” approach to supporting high-quality developers can continue…

This does not mean that the government is now much more short of cash than it was three years ago, he said, referring to the decline in revenue from land sales and taxes, as well as increased spending related to Covid measures.

China’s central government collected about 9.15 trillion yuan ($1.26 trillion) in total public revenue in 2021, according to the Ministry of Finance.

Revenues for the first eight months of the year were 6.36 trillion yuan, down nearly 10% from a year earlier excluding the tax credit.

Social perception

Public perception is also important, said Qin, who noted that people may become angry if the government helps debt-ridden developers.

Delivering ready-made housing is very complex and requires local coordination to resolve, he added.

In recent months, the state has reduced mortgage interest rates and given local authorities responsibility for solving real estate problems. Several cities also loosened home purchase restrictions this year.

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The Ministry of Housing and Urban-Rural Affairs emphasized to reporters last month that the state measures – special loans to promote the completion of housing – were aimed at supporting cities that need them. The amount was not mentioned.

The explosive growth of China’s real estate industry over the past two decades has taken a toll on tycoons who weren’t afraid to flaunt their wealth. In recent years, Beijing has emphasized reducing the national wealth gap.

A large part of the rapid growth of the real estate industry was due to the indebtedness of builders. Home prices skyrocketed, sparking concerns about the bubble and forcing families to take on debt to buy a home.

China could see more state-led developers in real estate, says economist

A record-long recession

China’s property decline has now entered its 10th quarter – a record stretch of more than two years, analysts said in a report on Oct. 13, based on Barclays’ analysis of quarterly real estate investment data.

That’s a departure from China’s previous real estate collapses, which averaged four to five quarters, according to the report.

Currently, the biggest challenge to restoring trust is still the weak economy and the slowdown in consumer and business activity caused by the zero-Covid policy.

Tommy Wu

China Chief Economist, Commerzbank

The prolonged decline means Chinese people are less willing to buy homes and benefit from rising prices, analysts said. This means a decrease in sales for developers.

“We do not expect a bailout of struggling developers, while the ‘market-driven’ approach to supporting high-quality developers can continue,” Barclays analysts said, citing measures such as the issuance of government-backed guaranteed bonds.

The government’s attitude

Evergrande’s Shenzhen unit announced at the end of September that it would cooperate with a state-owned company to ensure home delivery.

By the way, the state is focused on matters outside the real estate.

Many initially expected Beijing’s central bank to revive a lending tool this fall to help developers complete home construction — but it turned out to be infrastructure, Caixin reported this month, citing sources familiar with the matter.

China’s central bank did not respond to CNBC’s request for comment.

“Although stronger support helps [real estate]Currently, the biggest challenge to restoring confidence is the still weak economy and the slowdown in consumer and business activity caused by the zero-Covid policy,” Commerzbank’s Wu said.

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