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China’s real estate sector remains deep in crisis. Country Garden Holdings is the newest property company that has run into financial distress. The property giant failed to meet the repayment deadline for $22.5 mn in coupon payments on two US dollar-denominated bonds last week. If missing the 30-day grace period, Country Garden faces insolvency in September. It is one of the largest construction companies in China.
The developer also stoked major concerns after it posted a loss of 55 bn yuan ($7.6 bn) for the first half of the year, as against a net profit of 1.91 bn yuan last year. Sentiment worsened after Moody’s Investor Service downgraded Country Garden’s debt and cautioned that the developers’ plight is “likely to spill over to the country’s property and financial markets.” The real estate giant’s shares plummeted by 18% on Monday after trading was suspended in 11 onshore bonds issued by the group.
The real estate crisis in China
China’s real estate sector is suffering since 2021. Due to the Covid-19 crisis and the months-long lockdowns, many construction projects did not progress for months. Then regulators introduced the “three red lines” policy. This sudden clampdown on funds for developers resulted in a decline in fresh construction and home sales. Matters worsened after China Evergrande slipped to the brink of bankruptcy in 2021.
Several developers across China’s real estate share a similar plight. Ronshine China Holdings and Zhenro Properties Group are struggling to pay their debts. Another cash-strapped developer, Sichuan Languang Development, has already been delisted from the Shanghai Stock Exchange in June.
Lukewarm domestic consumption and weak overseas demand have made it difficult for China’s real estate sector to see a strong post-Covid recovery. The latest official data indicates that investment in real estate development for the January-July 2023 declined 8.5% over the year to 6.77 tn yuan ($943.5 bn), dragged down by the residential property segment.
Can China stop the downward trend?
The latest developments in China’s property market not only have a deep impact on homebuyers and the sector at large, it also casts doubt on the recovery of the economy.
The authorities acknowledged the gravity of the crisis and have been proactive in announcing measures for real estate. The Politburo pledged to ease housing curbs in its July meeting, which also led to a rebound in the property sector shares.
Top officials also urged banks to relax restrictions on property purchases and ensure balanced capital access for developers. Beijing also indicated that it is committed to optimising property policies. Not just this, in January 2023, The People’s Bank of China (PBoC) announced that it would ease its “three red lines” policy to 30 developers based on their performance and strategic importance.
Speaking about Beijing’s reform policies, Pictet Asset Management stated, “At the recent Politburo meeting, authorities pledged to step up counter-cyclical measures, which could include plans to help the easing of purchase restrictions to support the real estate sector. The Politburo meeting omitted the phrase ‘housing is for living, not for speculation purposes’ – an important signal”.
Andy Suen, co-head of Asia ex-Japan fixed income at PineBridge Investments highlights, “While there have been positive policy signals, the property sector requires more tangible and timely policy support for stabilisation.” Suen also cautioned that persistent defaults among developers could further dampen homebuyer confidence.
Broader spillover effects?
Market analysts are divided on how the Politburo’s measures will take effect. It is difficult to say if every developer would benefit from these measures. “We expect state-owned enterprises and a few non-defaulted private developers to be the main beneficiaries,” stated Fitch Ratings. “We do not expect the stabilising sales to drive a material recovery for defaulted developers, especially those undergoing debt restructuring.”
Experts are also concerned about the spillover effect of this slowdown on the rest of Asia Pacific. CNBC quoted Chetan Ahya, Chief Economist at Morgan Stanley, who cautioned, “A downside risk would be if China’s property sector does not stabilise even with the easing we expect. In that scenario, confidence and financial conditions will tighten in China, which will have direct implications for China’s growth but also will negatively spill over to the region.”
