China reluctantly gives property market a break

3 minute read

A statue of former Chinese chairman Mao Zedong is seen in front of a residential building in Dandong New Zone, Liaoning province, China June 12, 2018. Picture taken June 12, 2018. REUTERS/Stringer

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HONG KONG, Jan 20 (Reuters Breakingviews) - China’s tough stance on deleveraging the real estate industry is softening, however reluctantly. The government will let property developers access much-needed funds from escrowed prepayments, building on surprise cuts to interest rates. It’s a partial, and imperfect, solution, but options are running out.

The decisions represent an attempt to stabilise a wobbling sector that contributes up to a third of gross domestic output. Beijing’s leverage crackdown using its so-called three red lines have led to a series of defaults, and the construction sector has now contracted for two consecutive quarters, putting it officially in recession, per an analysis by Gavekal Dragonomics. Accompanied by renewed Covid-19 lockdowns, it jeopardises the country’s economic recovery.

There were some expectations that cash-rich state-owned entities such as China Resources Land might pad the fall by snapping up assets and helping complete paused, pre-sold projects. Such rescues haven’t materialised, however. Property M&A contracted 75% in 2021, per state media.

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In early January, Beijing tried to revive enthusiasm by exempting credit used for distressed acquisitions from regulatory debt caps, but deals can only do so much. A Refinitiv analysis suggests a whopping 3 billion square meters of projects were on pause as of June.

Against that daunting reality, regulators are extending a lifeline by unfreezing down-payments read more , Reuters reported. That could free up as much as 3.6 trillion yuan ($570 billion) to complete projects and pay suppliers, according to Breakingviews estimates. Local regulators may resist, worrying that companies will use the funds to meet obligations in other jurisdictions, but it will ease liquidity crunches at healthier developers, including Shanghai-based Shimao (0813.HK), which reported 22 billion yuan in escrow in June.

Another sign of support came from the central bank, which on Thursday slightly lowered the benchmark five-year loan prime rate used to set mortgages for the first time in nearly two years. The People’s Bank of China generally worries that easier money will fuel speculation instead of growth.

The combination of steps set off a relief rally. Shimao shares have jumped 22% this week, and even Evergrande’s (3333.HK) have gained. Beijing’s ultimate goal, however, is defending real economic stability, not rescuing bond traders. If these latest moves don’t put a floor under sliding growth, it may be forced to retreat across its three red lines.

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(The authors are Reuters Breakingviews columnists. The opinions expressed are their own.)

CONTEXT NEWS

- China on Jan. 20 cut its benchmark lending rates for corporate and household loans for a second straight month, while lowering a mortgage reference rate for the first time in nearly two years.

- The one-year Loan Prime Rate was lowered by 10 basis points to 3.7% from 3.8%, and the five-year LPR was reduced to 4.6% from 4.65%. The cut to the five-year LPR was the first reduction since April 2020.

- The country also is drafting nationwide rules to make it easier for property developers to access funds from sales still held in escrow accounts to ease a severe cash crunch in the sector, Reuters reported on Jan. 19, citing unnamed sources.

- In addition, China is making it easier for state-backed property developers to buy assets of debt-laden private peers by not requiring those loans to be counted as debt under rules that cap borrowing, Reuters reported on Jan. 7, citing a source with direct knowledge of the plan.

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Editing by Jeffrey Goldfarb and Katrina Hamlin

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