For China, reining in real estate a high-stakes balancing act

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Authorities are easing lending and home approvals despite Beijing’s push to reduce the economy’s reliance on assets.

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China’s bid to rein in its debt-ridden property market has become a high-stakes balancing act: without so much emphasis on excessive real estate construction that it sends developers down.


Even as Beijing doubles down on reducing the Chinese economy’s reliance on the country’s sprawling real estate sector, officials have stymied lending and home approvals to avoid a market slump amid a liquidity crisis. But has loosened restrictions, which has pushed developers like China Evergrande Group closer to bankruptcy.

According to data collected by China Beige Book International, bank credit is being rolled out to property firms at a higher level than at any other period during the second quarter or third quarter, with mortgage loans reaching 200 billion yuan (US$2 billion) in October. 31 billion dollars). 150 billion yuan ($23.5 billion) last month.

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In Chengdu, the capital of Sichuan’s southwestern province, authorities are expediting approvals for home sales and property loans, while easing restrictions on using proceeds from pre-sales. As cash-strapped developers are reluctant to bid for land – which is a major source of revenue for municipalities – some cities have started relaxing norms for the sale of land parcels.

“Beijing wants to ensure that the asset sector has enough liquidity to sustain construction,” Janz Chiang, an analyst at Trivium China in Beijing, told Al Jazeera. “But it also doesn’t want a sudden influx of easy credit – it is the same practice it has been trying to stamp out for years. So, their challenge is to find that magic between enough liquidity and preventing a repurposing of the asset sector. Where would the point be?

Shahzad Qazi, managing director of China Beige Book International, told Al Jazeera that there are signs of increased borrowing across the economy.

“Asset firms are really leading the pace with bond issuances,” Kazi said. “Not only are they seeing an improvement in lending through banking channels, but they are clearly being provided with a place to sell bonds to plug holes in their businesses as well.”

Kazi said tracking non-bank lenders would be a leading indicator of market direction.

“In the third quarter, we saw historic levels of non-bank lending in the sector, with 46 per cent of all loans taken by property firms coming from shadow lenders such as trust companies or small loan firms,” he said. “State-controlled banks were not lending to private companies at all, so they had to resort to non-bank lenders.”

Liquidity crunch at troubled developer Evergrande has raised concerns about the health of China’s property sector
[FILE: John Sibley/Reuters]

However, Beijing has indicated that it will not be distracted by its “stay home, not speculation” campaign.

In an essay earlier this month, Vice Premier Liu He said that authorities need to “stabilize land prices, home prices” to “solve home housing problems and promote the healthy development of real estate companies”. and focus on stabilizing expectations”.

“Top executives have made it clear that they are satisfied with their policies and have consistently reiterated their intention to cool the market,” Chiang said.

“While they are most likely to continue with their policy trajectory to cool the property market, we expect some degree of loosening of credit controls from banks, as regulators indicated that their policy on policies Excessive reaction is to blame for the slowdown.”

China’s real estate sector accounts for more than a quarter of the country’s economy, which officials have described as a threat to economic stability. Eight of the 10 most indebted property developers are based in China, and Beijing was aware of the problem of overleveraging even before Evergrande’s debt binge plagued investors.

In August 2020, Beijing began restricting borrowing with the “Three Red Lines” policy, which stipulates that developers looking to refinance are required to have a 70 percent ceiling on liabilities for assets, on contract. A 100 percent cap, excluding advance proceeds from sold projects. Net debt to equity, and a cash to short-term borrowing ratio of at least one.

The restrictions have contributed to a drop in new construction, home sales and home prices this year. Growth in real estate investment, which peaked at 38.3 per cent in January, fell to 21.6 per cent in April, 10.9 per cent in July and 7.2 per cent in October.

“There is a realization that the former growth model – which included high levels of debt, high levels of investment and high levels of growth – no longer works,” Kazi said. “Beijing realizes that it needs to move to a more sustainable model, which means a slower pace of growth.”

But Qazi said Beijing appears to be taking a flexible approach to restructuring the region.

“Beijing is working with local governments in some 200 cities where Evergrande has unfinished projects,” he said. “They are creating a task force to evaluate the condition of these unconstructed properties and transfer them to new developers so that Chinese families can be distributed what they have paid. Developers are adopting a flexible policy to stay off balance sheets.

‘Balanced and Sustainable Development’

Sam Zee, head of research at CBRE China, told Al Jazeera that while there were indications that banks were accelerating loan approvals for reasonable financing requirements, they did not expect any major easing of lending in the near term .

“The policy stance remains that ‘housing is for stay, not speculation’, and the ‘three red lines’ remain firmly in place to prevent additional speculation and over-gain in the region,” Xie said.

According to CBRE, Chinese-listed developers will have around $100 billion in corporate bonds expiring over the next two years.

Xie said, “As such, highly leveraged developers are expected to continue their focus on selling off non-core assets and put off any aggressive expansion plans, while the authorities’ emphasis remains on balanced and sustainable growth. “

Chiang, an analyst at Trivium China, said Beijing’s policy was driven by the market’s long-term outlook.

“Regulators believe that once the temporary recovery is over, the sector will be healthier than before, which is what they have been working on for years,” she said. “Policy makers will not allow this critical sector to suffocate, so some policy reshuffle is possible and increasingly looks probable. We have seen some level of easing, such as encouraging developers to issue bonds on the interbank market. Still, a complete U-turn on tight assets policy is not in the cards.”


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