Roundup: China’s Policymakers Offer Soothing Words to Revive Moribund Housing Market
Chinese government officials and regulators are working to restore confidence in the property market after recent turmoil triggered by the debt crisis engulfing developer China Evergrande Group fueled concerns that the real-estate industry’s troubles will spread to the rest of the economy and drag down growth.
Vice Premier Liu He and People’s Bank of China (PBOC) Governor Yi Gang are among the senior officials that have spoken publicly over the past week to reassure home buyers and investors that Evergrande’s problems are controllable and that there’s no risk of contagion into the broader property sector and the banking system.
Sales of new homes have plunged over the past few weeks and government data show new housing starts have slumped as cash-strapped developers have struggled to fund their operations, stymied by the PBOC’s three red lines policy to control their debt and banks’ increasing reluctance to extend credit to the industry.
Declining confidence among property purchasers has fueled concerns of a potential vicious cycle as sluggish sales lead to lower revenue for developers, pushing them into a liquidity crunch which makes it even more difficult for them to pay down their debts and fund their projects, further undermining market confidence.
Sentiment may improve this week after news emerged on Friday that Evergrande, the country’s most heavily indebted builder weighed down by $300 billion of liabilities, had paid $83.5 million in overdue interest on its offshore U.S. dollar bond, averting a default. The company also announced Sunday that work had resumed on more than 10 projects in six cities including Shenzhen, after saying in August that many projects had been suspended because of delays in payment to suppliers and contractors.
Developers including Sinic Holdings (Group) Co. Ltd. and Fantasia Holdings Group Co. Ltd. have defaulted on their bonds and credit ratings companies have made a wave of downgrades to the debt of major real-estate developers — from Oct. 15 to 20, Moody’s Investors Service lowered the outlook or cut the ratings of nearly 20 property firms including Greenland Holdings Corp. Ltd. (600606.SH), Guangzhou R&F Properties Co. Ltd. and Kaisa Group Holdings Ltd., according to Caixin calculations.
Risks under control
“Some investors had been expecting a significant near-term property easing, following the PBOC’s guidance in late September to ‘maintain the steady and healthy development of the property market,’” economists at Nomura International (Hong Kong) Ltd. wrote in a Monday note. “We believe there is some correction of some overdoing, but there will be no major changes to the ongoing property curbs.”
Vice Premier Liu, who is also head of the Financial Stability and Development Committee, said on Wednesday that the real estate sector’s reasonable demand for funding is being met and the overall trend of the industry’s healthy development will not change. The government will coordinate the prevention and control of financial risks and properly handle the default risks of a few large enterprises, Liu said in a speech at a financial forum.
Pan Gongsheng, a deputy governor of the PBOC, also weighed in at the same forum. “Under the guidance of financial regulators, the excessive contraction in risk appetite of financial institutions and financial markets has been gradually corrected, and financing behavior and financial market prices are gradually returning to normal,” he said.
Their speeches followed comments made by PBOC Governor Yi to a meeting of the Group of 30, an international body of financiers and academics, on Oct. 17 that while Evergrande problems were “a little bit of concern,” risks to the economy can be contained. Yi said “the spillover of Evergrande’s risk to the financial sector is under control” and that “we are confident that we can prevent the risk from spreading and avoid systemic risk.”
Officials from China’s banking regulator have also come out to reassure consumers. First-time home buyers will be supported and banks may be asked to offer preferential policies to them on down payments and interest rates, Liu Zhongrui, head of the department of statistics and risk monitoring at the China Banking and Insurance Regulatory Commission, said at a Thursday briefing. In China, first-time buyers are usually described as “rigid demand” (刚需) because they buy a property to live in rather than as an investment.
The officials’ comments are aimed at restoring confidence to shore up demand, the managing director of a fund management company focused on property financing told Caixin. Once potential home buyers realize the regulatory tone is easing, the market should start to improve, although it’s likely to take three or four months to see the trend emerge, the managing director said.
Regulators’ pledges to ensure adequate financing for developers are likely to benefit the biggest and state-owned companies the most, he said. They usually find it easier to borrow, while small and midsize firms would still find it difficult. “Most private developers told me they are pessimistic,” he said.
Official data released over the past month underscore how rapidly the housing market has cooled. Prices of pre-owned homes fell month-on-month in September in 52 out of 70 large and midsize cities surveyed by the National Bureau of Statistics (NBS), a report released Oct. 20 showed. The number of cities reporting a month-on-month drop in new-home prices rose to 36 from 20 in August, the most since May 2015.
Prices may have fallen in more cities than indicated in the NBS report because of distortions created by controls on prices imposed by local governments, Nomura economists wrote in a note last week. Local governments in at least seven cities have held talks with developers to limit price discounting.
Real-estate investment figures for the first nine months of 2021, released by the NBS on Oct. 18 along with third-quarter GDP data, showed investment in residential housing development rose 10.9% year-on-year, and sales rose 17.8% by value, slumping from a pace of 17% and 41.9% respectively in the first half of the year. New housing starts dropped 3.3% in the first nine months in terms of floor space, compared with 5.5% growth in the first half.
There are tentative signs that the worst of the slump may be over. Banks are making efforts to support home purchases — in October, mortgage rates for first-home and second-home purchasers in 90 cities both dropped one basis point from the previous month to 5.73% and 5.99%, respectively, the first month-on-month decline this year, according to a Wednesday note from the Beike Research Institute, a property industry think tank. Some industry participants told Caixin that banks are also likely to accelerate mortgage approvals.
There are also indications that sales of pre-owned homes are starting to recover. Transaction volumes in 11 surveyed cities jumped 198% in the week of Oct. 11 to 17 to 862,000 square meters from the previous week, reaching the highest in four weeks as the strong regulatory grip on the industry began to be eased, according to real estate data collector China Real Estate Information Corp. Transactions were still 43% lower on a year-on-year basis, a slightly deeper drop than the 40% seen the previous week.
But whether the improvement will be enough to bolster GDP growth in the fourth quarter remains to be seen.
The property sector likely contributes around 25% of China’s GDP growth directly and indirectly, Wang Tao, chief China economist at UBS Investment Bank, estimates. Last week she lowered her forecast for China’s fourth-quarter GDP growth to 2.7% year-on-year from 4% and cut her estimate for full year expansion to 7.6% from 8.2%, partly because of an expected further decline in property sales and investment.
Many economists and industry participants say that despite the government’s efforts to bolster confidence and ease some controls on property sales and financing, there will be no fundamental reversal of the long-standing policies to stamp out speculation and bring down the leverage of property developers.
Banks are still cautious about issuing loans to developers because they still have to comply with regulators’ caps on the proportion of credit that goes to the real estate industry, financial industry insiders said.
And although government officials are trying to revive confidence, renewed efforts by the government to introduce a property tax could still hold the market back in the short term. On Saturday, the standing committee of the National People’s Congress, the country’s legislature, authorized the State Council, the cabinet, to carry out a five-year pilot property tax reform in certain regions. Some analysts said the reform will likely disrupt local property markets in the cities chosen for the trials because it will rein in housing speculation.
Peng Qinqin, Wu Xiaomeng, Zhu Liangtao, Zhou Mi and Wang Jing contributed to this report.
Contact reporter Guo Yingzhe (firstname.lastname@example.org) and editor Nerys Avery (email@example.com)
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