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Wednesday, June 7, 2023

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Can China solve the real estate crisis?

Tono Judgment basis In Haiyang, a small coastal city, there are many high-rise buildings, and the prospect of Country Garden is quite slim. The company, the largest developer in China by sales, has sold few beachfront apartments. A few towers appear to have been only partially built. A faux-German village with peaked roofs houses shops and restaurants and adds some flair. But it was also almost empty. When the company’s profits all but evaporate in the first half of 2022, it will be a clear indication that the company has failed to sell homes.

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Country Garden is not the only Chinese developer facing such difficulties. In 2022, the national sales area will drop by 24%, which is the largest decline since the data became available in 1992. Meanwhile, real estate investment fell 10% year-on-year, the first decline on record. Defaults across borders have also proven difficult. Evergrande, the world’s most indebted developer that will go bankrupt in 2021, has yet to come up with a restructuring plan that was originally scheduled to expire in July. The company’s auditor, PricewaterhouseCoopers, resigned on January 16.Such a reduction in activity would be catastrophic for the Chinese economy, which derives about one-fifth of gross domestic product from the property.

Officials in the country are currently engaged in a massive policy redesign. The government has abandoned its “zero covid” approach to the pandemic while signaling an end to its crackdown on tech companies. Policy makers are also trying to save the housing sector. After two years of forcing developers to deleverage – which has led to dozens of developers defaulting – the regulator has now dropped many of those measures in an attempt to revive market sentiment. That sparked a degree of optimism. Despite Haiyang’s gloomy outlook, Country Garden’s shares have tripled since October.

The exact content of government reforms remains unclear. On Jan. 13, officials drew up a draft blackjack plan that they said was aimed at providing liquidity to “quality” developers. The task now is to distinguish these companies from the bad ones: there is no clear definition of what is good. The plan will also push policy banks to provide loans for stalled projects and state-owned asset management companies to provide credit for mergers and acquisitions. Commercial banks that have exited the property market have been told to restart lending to reliable developers. State media reported that the “three red lines” policy limiting debt would be relaxed for 30 unnamed companies.

Companies began raising new debt at a rapid pace in December – a sign that policy easing started before the government announced new measures. Local authorities have been reducing mortgage rates, with many now at record lows. The state’s bailout funds targeted unfinished construction. About 60 percent of the homes sold between 2013 and 2020 are believed to have yet to be delivered to buyers, but many of them have started paying. Without funding, construction projects stall. The fear of unfinished homes is keeping potential buyers away.

The state also hopes to avoid more messy defaults. On Jan. 17, Country Garden made its final payment to bondholders. This is due to the support of the local government, and currently few companies can do this except for large and important companies like Country Garden. About 950 billion yuan ($140 billion) of offshore dollar debt has matured this year alone, up from 810 billion yuan last year, according to data firm Refinitiv.

The program is showing some early results. Housing completions fell 6% year-over-year in December, recovering from an 18% decline the previous month (see chart). It’s a closely watched measure: Unfinished homes prompted homebuyers to boycott their mortgage payments last year as part of a wave of protests. Removal of covid-19 restrictions can help reform. In the weeks before the policy change, moving around Chinese cities, such as house inspections, was under threat of quarantine. Existing home sales in China’s 50 largest cities may have jumped by more than a fifth in the first 10 days of the year compared with the same period a month earlier, preliminary data from consultancy Beike Research Institute showed.

Kaisa, a developer that defaulted in 2021, has avoided restructuring talks with foreign investors and looks far from reaching an agreement with creditors. However, despite the troubles, demand for the company’s homes appears to be growing. Analysts at research firm CreditSights recently visited a project in Shanghai and found that agents were no longer offering apartment discounts. The absence of price cuts suggests that demand for well-located properties is starting to pick up.

The state’s plan has encouraged some foreign investors. Companies have been almost completely shut out of the offshore bond market, and many global asset managers and hedge funds are trying to cover losses after missed payments. Developers raised a quarter less money last year compared to the year before. But on Jan. 12, Dalian Wanda Commercial Management Co. priced a $400 million junk bond for the first time in more than a year, suggesting some high-profile developer-linked groups may slowly return to offshore dollars in the coming year. Bond Market. Two US asset managers, Fidelity and BlackRock, bought into the offering, according to research firm Reorg.

tightrope time

According to analysts at bank Morgan Stanley, the reforms could lead to a stabilization of the property market and a small rebound in sales in the second quarter of this year – roughly what the government hopes to achieve. But officials must tread carefully. Too much money would revive the old problem of oversupply, and it did so at a time when China’s population was starting to decline. Another bank, JPMorgan Chase & Co., estimates that the vacancy rate in China’s largest cities reached 7% last year and 12% in second-tier cities, well above the global average. About 70% of the homes sold since 2018 were bought by people who already owned at least one property.

Speculation has made China’s housing price-to-income ratio the most expensive in the world.Hong Haozhi to grow Asset management firm Investment said the three red lines policy would at least force developers to slow down their borrowing. The campaign has created huge problems for the Chinese economy, but without it, “it would have been much worse,” he added. If the government ends up spending too much money in bailouts, it could lead to another wave of excess, and more vacant waterfront projects.

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