Why Beijing won’t bail out its real estate sector

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Many Chinese developers have halted or delayed construction of pre-sold homes due to cash flow issues. Pictured is a housing construction site in Jiangsu province, China, October 17, 2022.

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BEIJING — China’s central government is unlikely to spend billions to rescue the ailing real estate sector, even as foreign investors hope for a massive bailout, analysts said.

A year after the Chinese developer EvergrandeAs the country’s debt problems began to rattle investors, the country’s housing problems only got worse. Some buyers refused to pay their mortgages due to construction delays, while real estate sales have plunged. Once-healthy developers are also struggling to repay their debt.

“I doubt there will be any direct government bailouts of property developers, although they may continue to ask the banks and [state-owned enterprises] to help selected struggling developers,” said Tommy Wu, senior China economist at Commerzbank.

He expects Beijing to gradually resolve real estate issues and reduce the industry’s role in the economy. Real estate and related industries account for about a quarter of China’s gross domestic product.

“New rounds of measures in the weeks and months ahead will most likely continue to focus on supporting home completions and boosting home sales,” Wu said.

S&P Global Ratings said in September it estimated the real estate market needed 700 billion yuan ($98.59 billion) to 800 billion yuan “to ensure struggling developers can complete pre-sold homes.”

A central government fund of a similar size has yet to be announced.

This is despite multiple reports, citing sources, of proposed funds. Some investment analysts expect such a fund, especially one large enough to build confidence.

Many developers are already struggling financially.

Total liabilities disclosed by Evergrande, Kaisa and shimao was over 2.6 trillion yuan in mid-2021, after which the financial problems of the three developers worsened. They represent only a fraction of the industry.

At this scale, even if the central government spent hundreds of billions of yuan, it would have little effect, said Qin Gang, executive director of China’s property research institute ICR.

We don’t expect bailouts from struggling developers, while the “market-driven” approach of supporting high-quality developers may continue…

This ignores the fact that the government is now much more cash-strapped than three years ago, he said, pointing to falling revenue from land sales and taxes, and increased expenditure for Covid measures.

China’s central government collected about 9.15 trillion yuan ($1.26 trillion) in total government revenue in 2021, according to the Ministry of Finance.

Those revenues for the first eight months of the year were 6.36 trillion yuan, down nearly 10% from a year ago, excluding tax credits.

Social perception

Public perception is also important, said Qin, who pointed out that people might get angry if the government helps these indebted developers.

The issue of delivery of finished apartments is very complex and requires local coordination to resolve, he added.

In recent months, the central government has reduced mortgage rates and given local authorities responsibility for solving housing problems. Several cities also eased restrictions on home purchases this year.

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The Ministry of Housing and Urban and Rural Development told reporters last month that central government measures – special loans to promote the completion of houses – were aimed at supporting towns in need. No amount was mentioned.

The explosive growth of China’s real estate sector over the past two decades has forged tycoons who were unafraid to flaunt their wealth. In recent years, Beijing has focused on closing the national wealth gap.

Much of the rapid growth in the real estate sector has been fueled by developer debt. House prices have soared, generating fears of a bubble, while forcing families to go into debt to buy a house.

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A record crisis

Based on Barclays’ analysis of quarterly real estate investment data, China’s real estate decline has now entered its 10th quarter – a record period of more than two years, analysts said in a report from the October 13.

This contrasts with an average of four to five quarters for previous housing crises in China, according to the report.

Currently, the biggest challenge to restoring confidence remains the weak economy and the curbs on consumer and business activity due to the zero-Covid policy.

Tommy Wu

Senior China Economist, Commerzbank

A prolonged decline means Chinese people will be less eager to buy homes and take advantage of higher prices, analysts said. This means lower sales for developers.

“We do not expect a bailout of struggling developers, while the ‘market-driven’ approach of supporting high-quality developers may continue,” Barclays analysts said, referring to moves like than the issuance of bonds guaranteed by the State.

Government position

In an example of how state entities are supposed to become increasingly involved, Evergrande’s unit in Shenzhen announced at the end of September that it would cooperate with a state-owned companyo ensure home delivery.

The central government has also focused on issues other than real estate.

Many initially expected Beijing to relaunch a central bank lending tool this fall to help developers finish building homes – but it turned out to be for infrastructure, Caixin reported this month, citing sources familiar with the matter.

The People’s Bank of China did not respond to a CNBC request for comment.

“While stronger support will help [real estate]Currently, the biggest challenge to restoring confidence remains the weak economy and the curbs on consumer and business activity due to the zero-Covid policy,” Commerzbank’s Wu said.

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