China’s property rebound is unstable

3 minute read

A pedestrian walks on an overpass near residential buildings and a surveillance camera, ahead of the annual National People's Congress (NPC), in Shanghai, China February 24, 2022. Picture taken February 24, 2022. REUTERS/Aly Song - RC29QS9SJ2C1

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HONG KONG, March 22 (Reuters Breakingviews) - The recent relaxation of official pressure on the Chinese real estate sector is less reassuring than it seems. Battered property stocks surged last week on regulators' promises to stabilise the sector. read more But bond investors are less confident, and defaults continue apace.

Reassuring comments by China’s economic tsar Liu He, promising less policy volatility and more market-friendly measures last Wednesday, set off a massive, broad-based rally on Chinese bourses. The benchmark CSI300 index of the top companies listed in Shanghai and Shenzhen is up over 6% since the speech.

Liu also signaled more support for the housing market, and while he was thin on specifics, state media reported shortly afterward that the much-feared property tax trial has been delayed. The Hang Seng Mainland Properties Index has popped up 30%; even shares in China Evergrande (3333.HK), the poster child for indebted mainland developers, are up slightly year-to-date – although trading has been halted since Monday. read more

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Bond investors’ response was far more restrained. Indexes tracking high-yield Chinese developer issues have risen slightly but remain deeply depressed. That is sensible. Minor easing steps at the municipal level, mostly focused on mortgage restrictions, have reheated speculative interest in top cities like Shanghai. But tight funding conditions persist at the national level. Developers still need to service around $32 billion of offshore bonds coming due later this year, say Moody’s analysts, and earnings are under pressure. Tianjin-based Sunac China (1918.HK), for example, estimated its annual net profit plunged 85% in 2021. Evergrande and rival Shimao (0813.HK) have both delayed reporting audited financials.

The root of the problem is the central bank’s “three red lines”, which cap developers’ debt-to-cash, debt-to-assets, and debt-to-equity ratios. They were introduced in 2020 to cut the industry’s eye-watering debt levels, and they pushed developers like Evergrande into restructuring. That crisis is not over. Liu’s comments might be a tacit call for more easing at the margins. But that won’t automatically bring buyers back to markets where prices are stagnant or falling, especially with Covid-19 resurging in mainland cities.

Official data showed China had a whopping 7.8 billion square metres of projects sitting unfinished by February. The sight of major developers defaulting on their debts also has shoppers worried they might not be able to complete pre-sold apartments. Absent more decisive policy support, investor relief is premature.

Graphic: Chinese property stocks have rallied but bonds have had less relief

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(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)

CONTEXT NEWS

- The Chinese government needs to reduce risks facing property developers, according to a meeting of the Financial Stability and Development Committee convened by Vice Premier Liu He on March 16.

- On the same day, China’s banking and insurance regulator said it would seek to stabilise land and home prices and encourage loans for mergers and acquisitions to purchase distressed real estate assets. The Finance Ministry will put a property tax trial planned for this year on hold, state-run Xinhua news agency reported.

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Editing by Pete Sweeney and Katrina Hamlin

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