China eases pressure on real estate sector but reform remains a priority

Chinese regulators have eased pressure on property developers by loosening credit controls and allowing more bond issuance in recent weeks in an effort to prevent the sector from collapsing. pour. But analysts and government advisers say the measures do not represent a retreat from President Xi Jinping’s crackdown on the sector.

Real estate is estimated to account for about a third of total economic activity in the world’s second-largest economy, highlighting the broader implications of any significant shift in policy. The industry has struggled in recent weeks to cope with liquidity crisis that has spurred some of the country’s biggest developers, such as Evergrande, to the brink of bankruptcy.

“There are still systemic risks posed by the property downturn to the broader economy,” said Deng Haozhi, a real estate analyst in Guangzhou. “Regulators to avoid that scenario is up to the regulator.”

“All of our previous efforts to regulate the property market failed because we left it halfway after the overhaul,” said a Beijing-based policy adviser. “This time the central government is determined to stick to the plan.”

Mortgage lending activity increased 1% in October, ending four consecutive months of declines year-on-year, according to Wind data, after Zou Lan, head of financial markets Principal at the People’s Bank of China, said some banks have misunderstood Beijing’s real estate policies. .

The goal, Zou said, is to limit the flow of credit to oversold real estate companies rather than stop issuing development loans. He added: “We have directed the major banks to keep the issuance of real estate loans stable and orderly.

Executives at banks in Beijing and Shanghai told the Financial Times that review times for mortgage applications had fallen from six months in September to less than three months. “We have acted too cautiously in the past,” said a loan officer at Merchants Bank of China. “We are now back to normal.”

The issuance of developer bonds is also being resumed. As of November 10, more than two dozen state-owned developers have announced plans to issue a total of Rmb 28.8 billion ($4.5 billion) of relatively low-interest debt instruments across the board. interbank market, which is often difficult for developers to access.

Zhejiang China Commodities City Group Co, a developer based in eastern China’s Zhejiang province, took just five days last week to secure approval to sell its nine-month bond, Rmbn, this week. “In the past, this process could easily take more than a month,” said one company executive. “Now things are moving forward.”

However, the policy easing has come too late for the country’s most indebted private-sector developers, such as Evergrande and Kaisa. Regulators hope they will be able to restructure by selling assets, which could lead to companies becoming much smaller, according to two officials at Evergrande.

“It doesn’t matter if a few big developers come together,” said Bo Zhuang, an analyst at Loomis Sayles, an asset manager. “But the Chinese authorities need to make sure that the overhaul policy doesn’t kill the entire industry.”

Loan officers say they are reluctant to help average real estate developers, especially after the number of housing transactions fell by almost a quarter in dollar terms in October compared with the same month last year.

“We do not expect real estate transactions to recover quickly as property buyers expect prices to continue to weaken,” said a loan officer at Merchants Bank of China. “That could undermine developers’ ability to generate cash flow to repay debt.”

New home prices fell in both September and October, and buyers are also worried about the government’s recent efforts to roll out property tax in some cities. “Homebuyers are waiting until they are clear on how much the tax will affect them,” the loan officer said.

An executive at Kaisa, whose company has missed many dollar bond payments this month, told a closed industry conference last week that the company had not benefited from the easing policies. recently. “We are in a very difficult situation,” Li said, according to a transcript of his remarks seen by the FT.

At a separate conference organized by China Index Academy, a consulting firm, last week, it was revealed that 15 of China’s 50 largest developers are measured by sales in 2018. 2020 – which includes 10 state-owned and five private companies – has a “good capacity” for the weather. risks.

Evergrande and Kaisa did not respond to requests for comment.

Developers are also being hampered by tighter government scrutiny of presale funds, which they could have previously used to close the funding gap. In recent months, more than two dozen cities have announced rules restricting the use of a project’s presale money for that project.

Sunshine City Group Co, a developer based in Fujian province, southeast China, recently had to request an extension of its $650 million bond payment despite reporting more than 27 billion Rmbn in cash in September. According to people close to the company, most of its cash was locked up in state-controlled custodian accounts devoted to specific projects.

“How can we find alternative sources of funding when our billions of cash cannot be used to repay debt,” a Sunshine City official complained earlier this month in a statement. open letter on social media.

Additional reporting by Tom Mitchell in Singapore and Xinning Liu in Beijing

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