Chinese Banks’ $178 Billion in ‘Medicine’ for Developers Won’t Cure All Ills

HONG KONG — China’s state-owned banks are showering the country’s property developers with loans and other promises of financial support, moves to prevent the embattled industry from sliding into full-blown crisis in the wake of a wave of debt defaults.

However, the generous aid is unlikely to quickly solve a core problem plaguing many Chinese developers: a deep slump in new home sales.

In recent days, large Chinese banks have said they will provide at least $178 billion in total yuan-denominated financial support to selected real estate companies. This includes lines of credit, letters of guarantee and commitments to purchase local bonds issued by developers.

The banks’ financial pledges came shortly after China’s central bank and major banking regulator put together a list of 16 measures to support the country’s ailing housing sector, which has been reeling from borrowing restrictions imposed on developers and lenders.

New commitments from state-owned banks, along with a recent expansion of a government-sponsored bond guarantee program, are designed to help developers stay in business and finish construction on their projects. The measures will help resolve near-term liquidity pressures for real estate firms, but the biggest challenge is restoring the confidence of ordinary Chinese citizens and homebuyers.

“The most important thing in the current market is to restore people’s expectations,” said Zhang Yu, senior real estate analyst at CICC Research. To achieve this, previously sold homes must first be delivered to buyers. He added that growing concerns about developer defaults — creating a negative feedback loop — should also be mitigated.

Weakening consumer confidence, as China’s economic growth slows and tough Covid-19 restrictions emerge, is also affecting home sales and slowing the pace of people getting together to form new families. The rising number of COVID cases in many major cities from Beijing to Guangzhou has prompted large-scale reinstatement of lockdowns in the past few days.

“The real hurdle now is the current epidemiological situation in China and the zero Covid strategy,” said Ting Lu, chief Chinese economist in Nomura, Hong Kong. “As long as this policy exists, the supportive measures on the funding side are drugs that can relieve symptoms, but cannot cure the disease,” said Mr. Lu.

Home sales are the biggest source of funding for Chinese developers, according to data from China’s National Bureau of Statistics. Local loans accounted for just over 10% of the total financing of real estate companies.

Official data this month showed new home sales in China by value fell 28% in the first 10 months of 2022 from a year earlier.

The funding support means that in the next few months, “quality developers” who haven’t already defaulted are unlikely to do so, said Shujin Chen, head of China financial and real estate equity research at Jefferies. To date, more than 30 developers have defaulted on their dollar-denominated bonds.

It expected home sales to drop another 10% or so next year before finding a new equilibrium.

Robin Sheng and Morgan Stanley‘s

New home sales are likely to have bottomed out, said China’s chief economist, but recovery momentum is likely to remain weak through the second quarter of next year.

Just before the economic downturn, Chinese developers were selling about 14 million apartments a year — but much of that was the result of speculative buying, he said.

Mr. Xing said he expects sales to eventually stabilize at about 10 million units annually, which he said will reflect the natural pace of urbanization and people joining together to start families in China.

Six state-owned banks announced their financing support for the real estate sector. Industry and Commerce Bank of China Ltd.

the nation’s largest bank, will provide up to $92 billion in financing to 12 developers including privately owned real estate giants Country Garden Holdings. a company

and Longfor Group Holdings Ltd.

as well as state-backed China Vanke a company

Shares of Chinese developers listed on the Hong Kong stock exchange rose on the news.

Under the agreements, banks will provide financial support to developers for activities that include project development, mergers and acquisitions, and local bond issuance.

Directed aid from the government shows that “regulators are increasingly concerned about the sector,” said Yao Yu, founder of YY Rating, an independent Chinese credit research firm. He added that it was not clear how much of the banks’ lending quotas – which represent the upper limits of potential financing – would end up being disbursed to the selected developers.

Many private developers are also seeking guarantees from a government-backed entity, China Bond Insurance Co., Ltd. , in order to issue yuan-denominated bonds in the domestic market.

On Wednesday, the country’s interbank bond market regulator said the state-backed guarantor had received more than 100 applications from private developers for credit improvements. To date, only a few such requests have been approved.

While Chinese developers may not be able to use their loans from local banks to pay off their existing international bonds, the prices of some of their dollar bonds have soared in recent days. Many are still trading at very distressing levels. The yield on the ICE BofA index of non-investment dollar bonds recently issued by Chinese companies was at 29% versus about 32% before the real estate easing measures were revealed.

Brandon Gill, head of the Asia-based financial restructuring group at Houlihan LockeyAnd the

He said the Chinese government’s broader real estate measures have the potential to help stabilize the sector.

This “could be vital in giving the industry the time it needs to restructure its debt burden,” he added. The American investment bank is a financial advisor to the China Evergrande GroupAnd the

Sunac China and many other distressed real estate companies.

Chinese President Xi Jinping’s speech at the 20th CPC Congress indicates that the country’s economy is moving in a new direction. As for US investors, they are likely to take more risk by investing in China. explains Dion Rabouin of the WSJ. Illustration: Elisabeth Smilov

write to Rebecca Feng at [email protected]

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