Trust is key to property recovery in China
How far is the “light at the end of the tunnel”?
Although regulators have announced numerous policies since March to support real estate sales, in September and during the Chinese holidays of October “Golden Week” (traditionally strong sales periods), we saw real estate sales in major cities remain sluggish. With ‘to live, not to speculate’ unchanged as the fundamental rule for regulating the sector, homebuyers refuse to buy in a bear market with low confidence in home completion and affordability, damaged by boycotts mortgages and regular city closings. We expect the recovery in the physical market to remain subdued and slow unless confidence issues are resolved.
In an effort to support the financing leg, in August the People’s Bank of China helped a few surviving Private Enterprise Promoters (POEs) to issue bonds guaranteed by onshore SOEs. This follows support from the China Securities Regulatory Commission in May for issuing bonds with credit default swap structures, in hopes of restoring confidence among financial institutions and bringing refinancing back to normal. bond of POE developers. However, refinancings have been small, at less than RMB 1.5 billion, and are likely unsustainable, limiting potential benefits.
As reported last week, the PBOC has asked six major banks to lend 600 billion RMB to developers, which we see as another positive attempt to avoid a full-fledged hard landing. However, we believe the policy is subject to execution risk.
With the marginal support, corporate liquidity remains very tight, as shown by CIFI’s recent interest default on its convertible bond, shortly after printing a 1.2 billion RMB secured bond. . Its default heightened the danger of a contagious bank run for other POE developers amid concerns over owners’ willingness to repay their obligations.
In conclusion, we believe that restoring the confidence of industry stakeholders is essential to ending the current vicious cycle – weaker pre-sales, weaker refinancing and mortgage payment boycotts, all of which have, in turn, led to more payment defaults. With divergent performance between SOEs and POE developers in recent months, we believe the landscape will continue to change, with SOEs (considered major players under the Common Prosperity Regime) taking more market share. However, we expect the sector’s vitality to weaken as a result and that sector-wide profit margins will remain under pressure in the near term. The importance of the Party Congress meeting next week is particularly significant, as businesses and investors hope for concrete support from the government for a sector that is on the brink of total collapse.
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