Can China Fix its Property Crisis?

• 29 January 2023
• Local News
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Plenty of Chinese developers have faced difficulties. The volume of floor space sold across the country fell by 24% in 2022, the biggest slump since data became available in 1992; property investment was down 10% year on year, the first drop on record. 

China has abandoned its “zero-covid” approach to the pandemic, while simultaneously signalling an end to a crackdown on technology firms. Policymakers are also trying to rescue the property sector. 

After two years of forcing developers to deleverage—which has pushed dozens to default on debts— regulators are now abandoning many of these measures in the hope of reviving sentiment. This has prompted a measure of optimism. 

The exact contents of the government’s reforms remain murky. On January 13th officials produced a draft 21-point plan which stated that the aim was to provide liquidity to “good-quality” developers. 

The plan will also push policy banks, including Commercial banks, to grant loans for stalled projects and state-owned asset managers. Meanwhile, the “three-red-lines” policy, which capped debt, will be relaxed for 30 unnamed firms. 

Companies began rapidly raising new debt in December—a sign that policy easing kicked off well. Local authorities have been lowering mortgage rates. 

Home completions rose by 6% year on year in December, after diving 18% the month before. Preliminary data from Beike Research Institute, a consultancy, suggest that sales of second-hand homes in 50 big Chinese cities may have risen by more than a fifth in the first ten days of the year, compared with the same period a month earlier. 

Despite its troubles, demand for the company’s homes seems to be growing. Analysts from Credit Sights, a research firm, recently visited a project in Shanghai and found agents were no longer offering discounts. The absence of price cuts suggests demand is picking up for properties in good locations. 

A few foreign investors have been encouraged by the state’s plan. On January 12th Dalian Wanda Commercial Management priced a $400m junk bond, the first in more than a year and a sign that some well-known developer-linked groups may slowly return to the offshore dollar-bond market in the coming year. 

The effort could lead to housing-market stabilization and a slight rebound in sales in the second quarter of the year, according to analysts at Morgan Stanley. Too much funding would revive old problems of oversupply and do so at a time when China’s population is beginning to fall, reckons JPMorgan, another bank. 

Hong Hao of grow Investment, an asset-management firm, says the “three-red-lines” policy at least obliged developers to slow down the rate at which they took on debt. The campaign brought on huge problems for the Chinese economy, but without it “the situation would be much worse”, he adds. 

Original Source: The Economist 

• Analysis