NOT long Earlier potential home buyers in China would find large maps on the walls of the property marketing office. The exhibition was not the only housing project for sale. The map also shows parcels of government land in the vicinity of the projects and their expected future prices, which were often higher than the house units for sale per square meter. The implication of the anxious buyer-to-be was clear: buy now, or regret forever. Soon the price of land next door will be much higher.
The maps tell the story of China’s property debt build-up for decades. This seemingly endless increase in prices was possible only because the developers had almost unlimited credit access. Adequate loans, offshore-dollar bonds and deposits from buyers once fueled the bidding war between them which pumped up the value of the land. The winners were sure that if they held the parcel and waited for the price to rise, they would make a huge profit. Local governments, too, gazed with joy; Land sales in 2021 contributed 43% of their revenue.
Home buyers are seeing a very different picture now. Chinese President Xi Jinping feared fugitive incapacity and indebtedness. He has stopped tapping simple loans by capping developers’ liability ratios for assets, net debt from equity and cash from short-term debt (known as the “three red lines”). This has pushed China’s property sector to the brink. Dozens of developers, including Evergrand, one of the world’s most indebted property groups, have defaulted on or come close to bonds since July 2021. Companies have recently begun to waver in what is considered a safe bet for investors. One of them, Shimao, missed the trust payment on February 24. Zhenro Properties shocked creditors on February 21 when it said it would not be able to repay creditors in early March.
Its effects extend beyond the offshore bond market. Construction work has stopped in some places. Some developers are now selling assets to patch up their cash flow. Many have stopped buying land, which has resulted in a 72% drop in the price of parcels sold by the local government in January this year. Home prices are dropping in many cities, shutting down speculators seeking certain huge profits after advertising on sales-office maps. Families looking for flats are wondering if they can be built
It is not clear whether the central government is firmly on its red line. If this is the case, the property market will be forced to make a huge adjustment to better match the supply with the actual household needs for the home. The annual supply of homes is now three times that of future urban-household construction, says Rhodium, a consultant. Sales should range from about 15m units per year to about 10m
As the bubble bursts, so does the impact on the Chinese economy. Senior leaders have yet to set economic growth targets for 2022, but many economists expect to draw a line at 5% (China GDP Increased by about 6% in 2019). The property sector, which makes up approximately 25%, will have a harder rate to protect GDP, Continue to crush. A major recession, as a result, will cripple a world economy already plagued by rising inflation and geopolitical conflicts.
To avoid a catastrophe, Beijing’s policymakers must meet three key tasks. First, they need to make sure that offshore defaults do not spiral out of control, and that dollar bonds will exclude Chinese issuers from the market. A second task is to ensure that firms continue to build homes and families continue to purchase them. This is crucial for economic growth this year. A third daunting challenge is to create a long-term plan that will bring some stability to the market over the next decade.
Mr. Shi probably didn’t expect such a rapid increase in offshore defaults. In all, about বিল 100 billion will have to be repaid this year. Evergrande, the $ 300 billion liability group, has been the biggest concern. It defaulted in December and has become the largest restructuring event in history. Investors are tracking the case because they are optimistic. The party is now considered to be under a high level of government control. It has promised to provide a restructuring plan by July. State involvement is good because it will help avoid a complete collapse, says one person involved in the restructuring. This means that stability will be the main priority, not speed or efficiency.
Resources are running low. Legal expertise is limited in such cross-border situations involving China and, so far, many Chinese defaulters are reluctant to cough up high-quality advice. Accounting firms have abruptly resigned from developing developers’ books. Some Chinese developers’ initial restructuring plans have created very little space for offshore lenders, says a lawyer working on a lawsuit. Evergrande’s offshore bonds are currently trading at সেন্ট 15 a dollar – a sad sign of what investors are expecting. The issue of high-yielding dollar bonds for Chinese companies, an important source of credit for them, has declined significantly.
The second task of the Communist Party will be to build developers’ buildings and purchase buyers. Sales of the 100 largest companies fell by almost half in February compared to the same month last year. Investment in property fell 14% in December. Prices have dropped in many cities. Domestic sales of drilling equipment fell by almost half in January this year.
Policymakers are restless. Like the Global Hedge Fund, they want to avoid ugly incidents in companies like Genro. The sudden push came because the developers did not give a clear picture of their total cash position. This includes billions of yuan kept tightly in escrow accounts by local governments who want to make sure the money is used to build houses, without paying lenders. When it comes to payment arrears, companies cannot access all the cash they have. Fitch, a rating agency, downgraded another major developer, Ronshine, on February 22 due to concerns that it would fail to access such funds.
Stuck money is also stopping some construction. Many workers have gone without pay and spread shovels. Evergrande claims they could build 600,000 homes this year – music to the ears of officials. However, on February 16, a court in mainland China froze the company 640 million yuan ($ 101 million) in cash after failing to pay a state-owned construction group.
The central government plans to standardize escrow accounts so that developers have less cash stuck in them. But that will not be enough to save the sector. Investors are hoping that Beijing will dazzle and reverse some of its tough policies. Some local governments are already in turmoil. On March 1, the central Chinese city of Zhengzhou said it would make it easier for people to buy a second home. In the south, the city of Guangzhou cut mortgage-loan rates by 20 basis points on February 22nd. Banks in Shanghai have made similar cuts.
If more cities follow, developers can avoid the reality that family needs are lower than they are – at least for a little longer. Analysts still have big questions about developers’ actual levels of cash and debt. Many believe there are huge off-balance-sheet debts that have not been reported, says Luther Chai of CreditSites, a research firm. Eight major developers, including offshore bonds, currently have much less unmanaged cash than short-term loans. Evergrande has only 40% of the cash to pay off its known short-term debt. Another big developer, Golden Wheel Tyandi has only 20%.
Mr. Xi loves to say that the Chinese people face “three great mountains” between them and their prosperity. These are education, healthcare and housing. The first two are already dominated by the state. Housing is still largely controlled by tycoons. From the government’s point of view, it would make sense if much more of the property sector was ultimately state-run, said Robin Jing of Morgan Stanley.
This seems to be part of a long-term plan তৃতীয় the third work of the Communist Party is underway. The state is already involved in two ways. The first is through state-owned asset-management companies (AMCs) In order to purchase bad debts. One of them, Cinda, is already working with Evergrand. But others are said to be silently exploiting bad loans from developers, effectively acting as a buffer for the banking system. This is because it has eliminated the need for a large state bailout AMCs Drip-feeding support for many companies, says a credit investor.
The state is ready to take a more direct, long-term role in the property market by purchasing subsidiaries of private developers. Evergrande said on February 25 that it would sell four projects to a state-owned company. In late January, Sunac, once an aggressive private acquirer of property assets, sold a 40% stake in a local subsidiary to the state-run Huafa Group. Regulators are encouraging banks to relax lending for mergers and acquisitions. State banks plan to issue about $ 4 billion in money bonds for asset consolidation, according to Caixin, A financial magazine. Developers in the state are also buying large tracts of land to help finance local government. Given the reputation of state institutions for inefficiency, the potential for waste is huge.
Taxes could become a major part of future housing policy. Theoretically a housing tax would serve two purposes: to discourage speculation and to generate local revenue. However, experts point out that those goals are conflicting. A tax that discourages investment will also limit government income. A tax pilot in Shanghai is set as low as 0.4% of the latest sale price. It did not discourage investors or generate too much revenue for local officials. There is no clear solution to delink local revenue from land sales. Adam Liu of the National University of Singapore says few local officials simply want to move away from selling land and get “sucking credit” in return.
More extreme corrections are floating. In January, Ren Jepping, a former chief economist at Evergrand, said China should print 2 trillion yuan for 50 million births in the next decade, effectively creating millions of future home buyers for the new cash-strapped family handout. The controversial idea prevented him from posting on Weibo, a platform like Twitter. But it also highlights the desperate nature of China’s demographic deficit.
If policymakers stick to their guns about limiting developer leverage, the property market must be pushed toward real demand from households over the next decade. This would mean a much smaller market. New housing began in 2019 at about 1.8 billion square meters, more than double that of 2008. In a highly optimistic situation where 65% of China’s 170 million people, currently 16-25 years old, eventually live in cities and 90% enter the housing market, which still generates about 50 million households in the next decade, Rhodium’s Allen Feng and Logan Wright estimate.
Even if each of those new families buys two houses, the current rate of building will meet that demand in just five and a half years. “Supply needs to be adjusted,” Mr Wright observed. Almost no other way. 3
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This article was published in the print edition of Finance and Economics under the heading “Another Crisis”