FREE MALAYSIA TODAY. 16TH AUGUST: Efforts to halt the slump in China’s housing market are gathering pace as local governments, banks, state-owned enterprises (SOEs), asset management companies and shareholders pump money into unfinished projects and cash-strapped developers.
A meeting of the Politburo on July 28 called for action to “stabilise the real estate market” and the use of “city-specific policies”. It also told local governments they would be responsible for ensuring the “timely delivery” of homes under construction that have already been paid for.
The top leadership’s demands followed the emergence of a mortgage boycott at hundreds of unfinished developments across the country as thousands of angry homeowners protested about repaying loans on unfinished properties. Their action has fueled concerns that banks, already heavily exposed to the property sector, could face another wave of nonperforming loans.
Zhengzhou, the capital of central China’s Henan Province and where many of the boycotts are taking place, has put in place a 10 billion yuan (US$1.5 billion) bailout fund, according to a report last week in the Dahe Daily, a state-owned provincial newspaper.
The Zhengzhou Real Estate Relief Fund, set up by a company owned by the city government, will leverage contributions from SOEs and banks to complete construction of unfinished projects that have stalled due to a lack of funding, the report said.
On Friday, Huarong Asset Management, a national state-owned bad-debt manager that is itself being bailed out by state-backed institutions, said it had signed a framework agreement to bail out the parent of cash-strapped developer Yango Group.
And on Sunday, debt-laden developer Greenland Holdings announced that two of its SOE shareholders will lend a combined 3 billion yuan to one of its subsidiaries to fund the completion of some projects so that the homes can be handed over to their owners.
“We believe more cities may follow Zhengzhou in setting up bailout funds, and more financial institutions will actively bail out developers and revitalize nonperforming assets,” China Real Estate Information Corp. (CRIC), a property consultancy, said in a report published Sunday. “The resumption of some delayed projects following the bailouts could help restore market confidence.”
The state-led rescues are fueling a debate about whether directly intervening to finish individual projects should be the main priority or whether the focus should be on bailing out property developers themselves, which might be more effective in stabilising the industry and restoring battered sentiment among buyers, investors and creditors.
“Saving projects and saving developers should be done at the same time,” analysts at Zheshang Securities wrote in a Friday note. Bailing out individual housing projects is too slow and will delay a recovery in market confidence, they said. “Only when there are strong measures … will we see a significant revival of key property industry indicators such as sales.”
The lack of more forceful and targeted support for developers could see them fall like dominoes, EH Consulting, a privately owned property think tank, wrote in a report Tuesday.
“The policies of only rescuing unfinished projects won’t be enough to solve the problems in the property market,” the think tank said. “It is difficult to undertake large-scale assistance for companies, but for stable developers with specific advantages, targeted support and assistance cannot wait. … Individual enterprises cannot be expected to withstand these external challenges by themselves.”
But critics of this approach say that rescuing developers risks creating moral hazard, because it will only serve to encourage investors and shareholders to bet on highly indebted companies in the belief that they will always be bailed out, thus leading to greater financial risk.
“Those who advocate for rescuing projects believe that some private real estate enterprises have expanded too aggressively and … have caused great risks to the domestic financial system, so it is their shareholders who should pay the price,” Faxun Finance Information, a Shanghai-based private think tank, wrote in a report published Monday. “Saving companies can lead to unrealistic expectations.”
More support needed
Given Politburo’s calls for local governments to take responsibility for getting residential developments finished, the priority for officials is clear.
Even so, the rescue funds are not a blank check for developers to get their projects built. The Zhengzhou fund, for example, sets out its criteria for providing money, which include only supporting potentially profitable projects that are expected to return their investment, according to the report in the Dahe Daily.
Money won’t be injected into distressed developers for them to use however they want. The fund will also only provide up to 30% of the funds needed to complete a project, with the remainder coming from other state-owned and private companies, and through loans from financial institutions.
Despite the additional support for developers and the property market, it won’t be enough to address the core problems facing the industry, said Hong Hao, former head of research at Bocom International Holdings.
“I think more assistance will come, and will likely intensify,” he told Caixin. “But as long as the three lines are in place and banks have limits on lending to developers, these bailouts are akin to using balm to soothe wounds that really need surgery.”
Hong was referring to the so-called three red lines policy introduced by the People’s Bank of China (PBOC) in the second half of 2020 to rein in the debts of overleveraged property developers by tying their ability to take on more borrowing to three financial metrics: liability-to-asset ratio, net debt-to-equity ratio and cash holdings to short-term debt.
Although financial regulators have urged banks to meet the “reasonable” financing needs of developers and to support qualified real estate projects, the PBOC has yet to relax the three red lines policy, making it difficult for companies to roll over their borrowings or raise money from new bond sales.
These strict conditions led to a liquidity crunch and helped trigger the financial meltdown that has now engulfed the real estate industry and led dozens of developers, including China Evergrande Group and Shimao Group Holdings, to default on their bonds.
Greenland and Yango are the latest heavily indebted developers being handed lifelines by shareholders or state-backed financial institutions. In June, Henan-based Central China Real Estate said it had signed an agreement with a subsidiary of an investment firm owned by the provincial government under which it would receive a cash injection of $1.4 billion Hong Kong dollars (US$180 million).
Even so, property companies are still in deep financial distress and the sector is facing a wall of bond repayment obligations over the next few months that will add even more pressure.
Developers rated by Moody’s Investors Service have US$27.7 billion of onshore bonds and US$34.2 billion of offshore bonds maturing or becoming puttable (where the bondholders can force the issuer to repurchase early) over the next 12 months, the ratings company wrote in a July 28 report.
But their ability to sell new bonds is constrained by weak demand as investors worry about the dire state of the property market. In the first seven months of this year, as of July 25, rated developers issued US$14.9 billion of onshore bonds, down from US$18.6 billion in the same period last year, while sales of offshore bonds slumped to US$2.7 billion from US$24.1 billion a year earlier, the report showed.
Chinese developers have about US$88 billion of distressed bonds, and while bondholders have agreed to exchanges or extensions on about US$27.8 billion over the past 12 months, their forbearance may not continue, S&P Global Ratings warned in a July 17 report.
“We think much depends on the level of sales recovery for China residences in the second half of 2022, and going into the first quarter of 2023,” the report said. “If a sales turnaround is not forthcoming, investors will reject repeated extensions, and will be more likely to press their claims through a holistic restructuring” or through the courts.
