China orders financial support for battered property sector

The Chinese government has urged banks and financial institutions to back a sputtering real estate sector where the biggest developers have buckled under the weight of tremendous debt and don’t have the capital to complete pre-sold homes to hundreds of thousands of homebuyers.

The move underscores Beijing’s dilemmatic position of having to defuse local government debt risks while pumping capital into the real economy to prop up growth. The property sector is particularly precarious not only because it is a major growth driver, but the housing issue is closely tied to social stability. 

Authorities told financial institutions that they need to support “reasonable” fund-raising requirements for developers that are “operating normally,” according to a report from the official Xinhua news agency Friday. 

The report added that capital raised through credit, bonds and stock issuance has paid off in helping stabilize the real estate market, citing a meeting organized by the central bank, the People’s Bank of China, foreign exchange and stock regulators, the State Administration of Foreign Exchange and the China Securities Regulatory Commission. 

The meeting was also attended by officials from the two stock exchanges, policy banks and 18 national commercial banks, five asset management firms and four of the country’s biggest stockbrokers.

There is no official tally of the extent of debt chalked up by property developers. 

China Evergrande is the world’s most indebted developer with more than US$300 billion in liabilities. It defaulted on its debt two years ago and has yet to come up with a repayment plan. At the end of October, a Hong Kong High Court judge gave the Hong Kong-listed company until Dec. 4 to come up with a plan when a winding-up hearing will be heard.

Evergrande is not alone. Country Garden and Sunac are also in hot soup. 

The crisis is more pronounced in tier-two cities or below, where most of the 841 demonstrations against property developers since January 2022 to date have occurred, based on data from Freedom House’s China Dissent Monitor. Most of them were staged by homebuyers demanding delivery of their properties with a smaller proportion of construction workers seeking salary payments.

Implications of property woes

China’s property crisis is a growing concern and a drag on the broader economy – the financial wellbeing of local governments, where traditionally, land sales for real estate projects are a huge contributor to their revenues. 

These governments are already under pressure from the cracks of local government fund vehicles that are issued to fund infrastructure like roads and airports but have not generated enough returns to cover their obligations. And massive debts piling up are also fueling concerns of a systemic financial crisis.

The Central Financial Commission, the financial watchdog led by Premier Li Qiang, on Monday emphasized in a meeting the need to improve financial services that will help economic development.

“It is necessary to comprehensively strengthen financial supervision, the responsibility of managing risks, coordination among departments, heighten control of the risk sources as they are diffused, and boost relevant reforms to improve prevention, warning and management mechanisms,” according to a separate Xinhua report citing a commission meeting that Li chaired.

Government debts are expected to account for 83% of China’s gross domestic product in 2023, up from 77% last year, according to data from the International Monetary Fund. 

The IMF’s Mission Chief for China, Sonali Jain-Chandra pointed out that more measures are needed to secure a recovery of the property market, which should include ways to accelerate the exit of troubled developers and greater central government funding for housing completion, following a visit to China early this month.

According to analysts at Nomura, an estimated 20 million units of unconstructed and delayed pre-sold homes across the country are the biggest hurdle to turning the property crisis around, and about $440 billion will be needed to complete their construction, CNBC reported.

In October alone, official data showed that the scale of unsold floor area for residential real estate soared by 19.7%, compared with October 2022. Funds raised by developers dropped 13.8% to 10.73 trillion yuan (US$1.48 trillion) in the first 10 months of the year. Domestic loans into real estate dropped 11% while foreign investments plunged 40.3% in the 10 months.

The rating agency S&P Global has forecast China’s property sales to fall as much as 15% this year, with the drop to taper off to 5% for 2024. The continued property slump would hinder the post-COVID recovery of the world’s second-largest economy where real estate and its related industries make up about 30% of GDP.

Beijing has also been ramping up measures to prop up the economy. It announced last month a 1 trillion yuan government bond issuance, which allows local governments to frontload part of their 2024 bond quotas.

Indications for 2024

Investors and businesses are also watching out for more indications on Beijing’s macroeconomic direction for 2024 at next month’s annual Central Economic Work Conference.

“I think they will continue to send similar signals as what we’ve seen in the past couple of quarters. That is, a high priority to supporting private consumption, fighting financial risks including from housing, continued fiscal support and continued support for the private sector and further opening-up,” said Allan von Mehren, China economist for Danske Bank. 

“It will be interesting to see if we get any clues about their growth target for 2024.” 

Von Mehren pointed out that there is speculation of a 5% target but he sees this as a “quite ambitious target as the base effects will be much less favorable compared to this year.” Beijing has set a growth target of around 5% for this year, which state media has touted this month to be within reach.

Last month’s data show China’s recovery to remain uneven. While industrial output and retail sales were on an uptrend, the consumer price index, a gauge of inflation, slid, as did producer prices. 

Edited by Mike Firn and Taejun Kang.