Chinese regulators have eased pressure on property developers by loosening credit controls and allowing more bond issuance in recent weeks in an effort to prevent the sector from collapsing. But analysts and government advisers say the measures do not represent a retreat from President Xi Jinping’s crackdown on the sector.
Real estate is estimated to account for as much as one-third of overall economic activity in the world’s second-largest economy, highlighting the wider implications of any significant shift in policy. The industry has been struggling in recent weeks to deal with a liquidity crisis that has driven some of the country’s biggest developers, such as Evergrande, to the brink of bankruptcy.
“There are still systemic risks posed by a real estate meltdown to the broader economy,” said Deng Haozhi, a Guangzhou-based property analyst. “It is up to regulators to avoid that scenario.”
“All of our previous attempts to regulate the real estate market have failed because we exited halfway through overhauls,” said a Beijing-based policy adviser. “This time the central government is determined to stick to the plan.”
Mortgage lending increased 1 per cent in October, ending four consecutive months of year-on-year declines, according to Wind data, after Zou Lan, head of financial markets at the People’s Bank of China, said some banks had misinterpreted Beijing’s real estate policies.
The objective, Zou said, was to restrict the flow of credit to overleveraged property companies rather than to stop the issuance of development loans. “We have instructed major banks to keep real estate loan issuance steady and orderly,” he added.
Executives at banks in Beijing and Shanghai told the Financial Times that the review time for mortgage applications had fallen from six months in September to less than three. “We have acted too cautiously in the past,” a loan officer at China Merchants Bank said. “We are now returning to normal.”
Bond issuance by developers is also resuming. Since November 10, more than two dozen state-owned developers have announced plans to issue a combined Rmb28.8bn ($4.5bn) worth of relatively low-interest debt instruments on the interbank market, which developers have traditionally had difficulty accessing.
Zhejiang China Commodities City Group Co, a developer based in the eastern province of Zhejiang, took just five days last week to secure approval to sell a nine-month, Rmb1bn note this week. “In the past the process could easily take more than a month,” a company executive said. “Now everything is being expedited.”
The policy loosening, however, has come too late for the country’s most heavily indebted private-sector developers, such as Evergrande and Kaisa. Regulators hope they will be able to restructure by selling assets, which could result in the companies becoming much smaller, according to two officials at Evergrande.
“It won’t be a problem if a couple of big developers to go under,” said Bo Zhuang, a Singapore-based analyst at Loomis Sayles, an asset manager. “But Chinese authorities need to make sure the policy overhaul doesn’t kill the entire industry.”
Loan officers say they are reluctant to help overleveraged property developers, especially after the number of residential transactions fell almost a quarter by dollar value in October compared to the same month last year.
“We don’t expect housing transactions to recover quickly because property buyers expect prices to weaken further,” said a loan officer at China Merchants Bank. “That could undermine developers’ ability to generate cash flow to pay off debt.”
New home prices declined in both September and October, and buyers are also worried about the government’s recent efforts to roll out a property tax in some cities. “Home buyers are standing by until they are clear about how much the tax will affect them,” the loan officer said.
An executive at Kaisa, which has missed multiple dollar-bond payments this month, last week told a closed-door industry conference the company had not benefited from the recent policy relaxations. “We are in a very difficult situation,” Li said, according to a transcript of his remarks seen by the FT.
At a separate conference hosted last week by the China Index Academy, a consultancy, it was revealed that 15 of China’s top 50 largest developers measured by sales in 2020 — including 10 state-owned and five private companies — have “good capacity” to weather risks.
Evergrande and Kaisa did not respond to requests for comment.
Developers are also being hampered by stricter government oversight of presale funds, which they were previously able to use to bridge funding gaps. In recent months more than two dozen cities have announced rules limiting the use of a project’s presale proceeds to that project only.
Sunshine City Group Co, a developer based in Fujian province, in south-east China, recently had to ask for extensions on $650m worth of dollar-bond payments even though it reported more than Rmb27bn in cash in September. The bulk of its cash was locked in state-controlled custodial accounts earmarked for specific projects, according to people close to the company.
“How can we find alternative sources of funding when our billions in cash can’t be used to pay off debts,” a Sunshine City official complained earlier this month in an open letter on social media.
Additional reporting by Tom Mitchell in Singapore and Xinning Liu in Beijing