China Property Easing Has Traders Asking If the Worst Is Over
(Bloomberg) -- Has China’s crackdown on property developers reached a turning point?
The question is popping up on trading desks around the world after a flurry of positive signals from Beijing. Developer shares and bonds have sprung back from this year’s lows. Goldman Sachs Asset Management, Oaktree Capital Group and one of Asia’s oldest hedge funds have begun fishing for opportunity.
While Communist Party policy is typically hard to read, there are signs an effort is underway to limit contagion spreading from weak developers to higher-rated peers. Authorities are fine-tuning to avoid a systemic liquidity crunch and ensure social stability, according to five bankers and regulators who’ve been briefed on the changes and asked not to be named discussing a sensitive issue.
Anyone betting on a more dramatic reversal may be left disappointed. There’s no intention for now to roll back a broader campaign to rein in reckless borrowing and property speculation, the bankers and regulators said. China will continue to curb the “financialization of real estate” and prevent the sector from turning into a bubble, the banking regulator vowed in a statement last week.
“An about-turn in real estate policy in 2022, in our view, very unlikely,” S&P Global Ratings analysts led by Renyuan Zhang wrote in a report this month. “However, the recent spate of credit events among developers may see policies ease slightly.”
S&P Global said it expects more defaults by property firms next year, as contracting profit margins restrict cash inflows at the same time as the credit crunch exacerbates refinancing risks. Stronger developers, especially state-owned firms, will be able to survive and grow their business, the credit assessor said in the note.
Fears of financial contagion began intensifying last month after a surprise default by Fantasia Holdings Group Co., which had just weeks earlier assured investors it had ample liquidity. Soon higher-rated companies such as Country Garden Holdings Co. and China Vanke Co. were swept up in the selloff, prompting regulators to act more boldly.
Here are some of the moves afoot:
- ASSET-BACKED SECURITIES: China plans to ease funding curbs in the $152 billion asset backed securities market for property developers, allowing “high quality” names to resume issuance after a three-month freeze. This follows an earlier move allowing lenders to apply to sell securities backed by home mortgages to free up loan quotas, easing a ban imposed early this year.
- INTERBANK BOND ISSUANCE: The local interbank market is seeing its strongest month of debt issuance by builders in eight months with three Chinese state-owned developers selling a combined 8.6 billion yuan ($1.4 billion). The sales follow a meeting between some developers and the industry body that helps regulate issuance, according to the Securities Times. Strong demand by banks may prompt more firms to follow suit.
- HOME LOANS: A central bank report last week highlighted outstanding personal mortgage loans rose 348.1 billion yuan month-on-month to 37.7 trillion yuan. The rare breakout of monthly figures was aimed at “addressing market concerns,” according to commentary in The Securities Times. Bloomberg has reported that financial regulators told some major banks to accelerate mortgage approvals.
- ASSET SALES: The People’s Bank of China is considering easing rules to let struggling developers sell assets to avoid defaults, Dow Jones reported last week, after a similar report by local media Cailian. State-owned firms told authorities that the “three red lines” borrowing caps would be breached if they were to make acquisitions in the sector by assuming debts, according to Cailian.
“Partial easing may be the best approach at this moment,” said Banny Lam, the Hong Kong-based Head of Research at CEB International Investment. “Under the current approach, developers will handle their debt obligations through sales of property inventories or other assets in the market.”
That’s easier said than done. With easing targeted at healthier developers, Beijing avoids the moral hazard of being seen to bail out firms that binged on debt. But weaker builders are in the tough position of finding ways to refinance old borrowing and complete unfinished projects, all while being effectively shut out of the bond market they formerly relied on for funding.
Developers face a wall of maturing dollar and local bonds at the beginning of 2022. The builders have a total of $13.4 billion of dollar bonds and the equivalent of $12.6 billion in yuan notes coming due in the first quarter, according to data compiled by Bloomberg.
Another big challenge is waning confidence among home buyers, spooked by two straight months of price declines and a looming property tax trial greenlit by the State Council. Dozens of homeowners descended on the sales office of a new residential development in Nanyang last month demanding refunds, after the value of their homes depreciated at least 30% in less than a year, Caixin reported.
Regulators stressed at a recent meeting that stabilizing home sales will be key, one of the people familiar with the matter said. At one state-owned bank, most efforts were focused on expediting mortgage approvals, while another bank was temporarily allowed to exceed a quarterly cap on real estate lending. Some banks have also been permitted to lend using next year’s quota.
Authorities could offer further respite by lifting the limits put in place for how much credit banks can extend to the sector. But officials have made reducing the systemic risk posed by the property industry a key priority this year. About 41% of China’s banking system assets were either directly or indirectly associated with real estate at the end of 2020, Citigroup Inc. estimates. Officials are awaiting the annual central economic work conference, usually convened in mid-December, for guidance on the direction of economic and monetary policies next year.
The Chinese government “will not provide a bailout to property developers” as it wants to move the economy toward more market-oriented functioning, said CEB International’s Lam. “China cannot afford to provide a bailout each time a sector is embedded in a debt crisis.”
©2021 Bloomberg L.P.