Why doesn’t China save its real estate sector?

Many Chinese developers have halted or delayed construction of pre-sale homes due to cash flow problems. Pictured here is a real estate construction site in Jiangsu Province, China, on October 17, 2022.

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Analysts said China’s central government is unlikely to spend billions to rescue its ailing real estate sector, even if foreign investors are hoping for a massive bailout.

After a year from the Chinese developer EvergrandeThe country’s debt problems are starting to worry investors, and the country’s real estate problems have worsened. Some homebuyers have refused to pay their mortgages due to construction delays, while property sales have slumped. The once healthy developers are struggling to pay off the debt.

“I doubt there will be direct bailouts of real estate developers by the government, although they may continue to ask banks and [state-owned enterprises] To help select struggling developers, said Tommy Wu, chief China economist at Commerzbank.

It is expected that Beijing will want to gradually solve real estate problems and reduce the role of industry in the economy. Real estate and related sectors account for about a quarter of China’s gross domestic product.

“New rounds of measures in the coming weeks and months will likely continue to focus on supporting home completions and stimulating home sales,” Wu said.

Ratings agency Standard & Poor’s said in September that it estimated the property market needs between 700 billion yuan ($98.59 billion) to 800 billion yuan “to ensure that struggling developers can finish their ready-for-sale homes.”

A central government fund of similar size has yet to be announced.

This is despite multiple reports, citing sources, of the proposed funds. Some investment analysts expect such a fund, especially one large enough to boost confidence.

Many developers are already struggling financially.

Statement of total liabilities before EvergrandeAnd the cyst And the Shimao It was more than 2.6 trillion yuan until mid-2021, after which the financial problems of the three developers worsened. They make up only a small part of the industry.

On this scale, even if the central government spent hundreds of billions of yuan, it would have little effect, said Qin Gang, executive director of the China Real Estate Research Institute ICR.

We don’t expect to bail out struggling developers, while the “market-oriented” approach to supporting quality developers can continue…

He said that this does not consider the government to be suffering from a significant shortage of cash now compared to what it was three years ago, pointing to lower revenue from land sales and taxes and increased spending on Covid measures.

China’s central government collected about 9.15 trillion yuan ($1.26 trillion) of total public revenue in 2021, according to the Ministry of Finance.

That revenue for the first eight months of the year was 6.36 trillion yuan, down about 10% from a year ago without including tax breaks.

social perception

Public perception is also important, Chen said, noting that people may be angry if the government helps indebted developers.

He added that the issue of handing over ready-made apartments is very complex and requires local coordination to resolve it.

In the past few months, the central government has lowered mortgage rates and given local authorities the responsibility to solve property problems. Several cities have also eased restrictions on home buying this year.

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The Ministry of Housing and Urban and Rural Development assured reporters last month that the central government’s measures – special loans to promote housing completion – were directed at supporting cities in need. No amount was mentioned.

The explosive growth of the real estate industry in China over the past two decades led to the coining of money tycoons who were not afraid to flaunt their fortunes. In recent years, Beijing has emphasized reducing the national wealth gap.

Much of the real estate sector’s rapid growth has been driven by developed debt. Home prices soared, sparking fears of a bubble, while forcing families to take on debt to buy a home.

Economist says China could see more state-led developers in real estate

Standard long slack

Based on a Barclays analysis of quarterly property investment data, the Chinese property slump has now entered the 10th quarter — a record long period of more than two years, analysts said in an October 13 report.

It contrasts with an average of four to five quarters of the previous housing slump in China, the report said.

Currently, the biggest challenge to restore confidence remains the weak economy and the hurdles to consumer and business activity due to the zero-Covid policy.

Tommy Wu

Chief Chinese Economist, Commerzbank

Analysts said that the prolonged decline means that Chinese people will be less willing to buy homes and take advantage of higher prices. This means developer sales are down.

“We don’t expect bailouts for troubled developers, while the ‘market-oriented’ approach to supporting quality developers can continue,” Barclays analysts said, referring to measures such as the issuance of state-backed secured bonds.

government position

In an example of how state entities can increasingly be expected to participate, Shenzhen’s Evergrande unit announced in late September that it would partner with a state-owned enterprise to ensure home delivery.

Otherwise, the central government has kept its focus on issues outside the real estate sector.

Many initially expected Beijing to revive a central bank lending tool this fall to help developers finish building homes — but it turns out it was for infrastructure, Caixin reported this month, citing sources familiar with the matter.

The People’s Bank of China did not respond to CNBC’s request for comment.

“While more robust support will help [real estate]Commerzbank’s Wu said that the current biggest challenge to restore confidence remains the weak economy and the drag on consumer and business activity due to the zero-Covid policy.

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