Optimism for China’s real estate sector is growing after the government’s financial package

A woman rides a scooter past the China Evergrande Group Royal Peak construction project in Beijing
An unfinished residential complex by Evergrande in Beijing. China’s housing crisis exploded when the developer defaulted on its international debt last year © Bloomberg

Chen Jian, a 35-year-old from the city of Wuhan, is one of many victims of China’s housing crisis. He bought an apartment in 2020, but the developer behind it collapsed, leaving him and his family unable to move into an unfinished home.

Across China, an industry that contributes more than a quarter of economic growth has been bottomed for more than a year as many developers ran out of cash. Now a government support package unveiled over the weekend has provided a rare glimmer of optimism for those affected by his ailments.

“I hope the new measures can work out a solution for us,” Chen said. “We’re under a lot of pressure.”

The 16 measures, signed by the central bank and key banking regulator, require banks to extend their loans to the real estate sector, giving builders more time to complete unfinished projects. They also offer fundraising and exit plans for unsold homes.

In addition, banks are being encouraged to give homebuyers more time to pay off their mortgages. In China, where homes are often bought before they are completed, the crisis has prompted mortgage payment boycotts.

Although it falls well short of a bailout, the government’s new package – in an environment where the economy has struggled even under zero Covid restrictions – has had an immediate impact on sentiment.

“I think this is a turning point for the market,” said Michelle Lam, economist for Greater China at Société Générale, who described the measures as a “housing bailout.”

“We should expect a rebound in real estate sales and investment from here on out, especially in the second half of next year,” she said.

Tao Wang, chief China economist at UBS, agreed. “Senior policymakers have taken a more decisive step to facilitate financing of the real estate sector,” she said. “The latest move confirms our view that property sales and launches should stabilize over the next few months.”

“We therefore expect real estate to be much less of a drag on GDP growth in 2023,” she added.

China’s housing crisis, which exploded last September when developer Evergrande defaulted on its international debt, has taken a heavy toll on the economy. In October, Wang notes that home sales are down 23 percent year-on-year, while developer land purchases have more than halved. GDP rose 3.9 percent in the third quarter, well below the annual target of 5.5 percent, which was already the lowest target the authorities had set in decades.

Still, the new measures are not a clear linchpin of the government’s existing approach, according to Wang Qi, chief executive of fund manager MegaTrust Investments in Hong Kong. “China’s solution to the current situation has been consistent from day one, starting with Evergrande’s default,” he said. “The top priority is to get construction going and deliver off-plan homes.”

Richard Xu, an analyst at Morgan Stanley, said the notice from the People’s Bank of China and the China Banking and Insurance Regulatory Commission is merely a formal formulation of what banks have already been instructed to do. The measures could help buy time, but are not necessarily intended to stimulate a larger recovery.

SocGen’s Lam agreed that this wouldn’t necessarily change the long-term outlook: “Even if we see a recovery in home sales next year, a sustained recovery is not likely,” she said.

“We still have to face the transition from the growth model to one that is less dependent on demand for housing. We know policymakers only want to support structural demand, not speculative demand.”

Since a previous housing crisis in 2015, authorities in China have emphasized that housing is for “habitation” rather than speculation. At last month’s Communist Party congress, the challenges in the sector were barely mentioned. Local governments, which have relied heavily on land sales to developers to fund their spending, remain under severe pressure.

Consumer spending was also hit. Retail sales turned negative yoy in October. Consumption in China is closely linked to the housing sector – both in terms of trust and the purchase of appliances and other items that come with a new home. Iris Pang, chief China economist at ING, noted that sales related to moving into a new home, namely consumer electronics, decoration and furniture, fell by 14.1, 8.7 and 6.6 percent respectively last month are.

“I think household confidence will eventually be restored,” SocGen’s Lam said.

However, uncertainty continues to weigh on potential buyers. A 30-year-old, who asked to be recommended only under the Sun name, said she had thought about buying a home for the past two years but put off her purchase because she felt the market was deteriorating will.

She saw the new measures as support for the development of new housing and not as a disruption to existing buildings.

“The economy hasn’t bottomed out yet and I think the bottom could be in the second quarter of next year,” she said. “I’ll wait until then.”

Additional reporting by Wang Xueqiao in Shanghai

https://www.ft.com/content/0f4f179c-31de-4e4b-af80-9c5fdc305911 Optimism for China’s real estate sector is growing after the government’s financial package

Adam Bradshaw

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