Beijing has shortcut to prop up real estate
HONG KONG, Jan 28 (Reuters Breakingviews) – Beijing can have its deleveraging cake and prop up the market too. The central government is pushing for mergers and acquisitions to ensure stalled projects get completed, but deals have been slow, and some regions are falling toward recession. read more Policymakers don’t want to abandon their push to discipline real estate developers, however. Fortunately, there’s an alternative.
The lack of enthusiasm for snapping up distressed property assets even among cashed-up state enterprises is unsurprising given uncertainty about hidden debts. Shimao (0813.HK) did manage to sell prime land in Shanghai, and debt-sodden Evergrande (3333.HK) also cleared a small transaction where it handed over a project in exchange for debt forgiveness. Otherwise, activity has been restrained. read more
Nearly half of the $55 billion in property developers’ bonds maturing this year are due in the first four months, so defaults seem likely to accelerate if nothing changes. Many flats pre-sold to buyers might stay uncompleted too, a political problem. And the suppression of a sector that drives up to a third of GDP is increasingly dragging down general growth.
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The People’s Bank of China has already eased interest rates, but the cuts have been conservative. On the other hand, they must remember that the aggressive monetary easing unleashed to combat the last property downturn in 2014 ended up reinflating asset bubbles. Dismantling the so-called three red lines that lock indebted property developers out of credit markets would mark an embarrassing retreat in President Xi Jinping’s campaign to reduce overdependence on real estate investment.
The alternative is reducing another form of intervention, specifically lowering the high mortgage down payment ratios many municipal authorities have enacted to cool speculation, as high as 80% in some locations. Mortgage loans grew only 11% year-on-year in the third quarter, the slowest rate since 2013. Reducing those would probably bring some buyers back to the market and put a floor under falling prices. That in turn might revive interest in M&A and improve developer balance sheets without increasing their borrowing.
It is not a perfect solution. For one thing it might re-heat speculation in popular top-tier cities like Shanghai, but do little for demand in poorer regions. But history shows that it is near-impossible to deflate a property bubble painlessly. For authorities wary of a hard landing, it’s about picking the lesser evil.
Scared away: High mortgage down payment rations in China have slowed investment
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CONTEXT NEWS
– China’s Ministry of Housing held a meeting on Jan. 20 where it laid out priorities for 2022. The ministry would need to focus on “increasing confidence, preventing risks, stabilizing growth, and maintaining stability,” according to a meeting summary posted on its site. But it also reiterated the imperative not to use real estate as a short-term tool to stimulate the economy.
– Average new home prices in China’s 70 major cities declined 0.2% in December from a month earlier, according to Reuters calculations from data released by the National Bureau of Statistics on Jan. 15.
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Editing by Pete Sweeney and Katrina Hamlin
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