China’s direct interventions to ease a cash crunch for crisis-hit property developers are a step in the right direction, but analysts say these actions must be complemented by stronger fiscal and monetary policies to shore up demand in the sector.
The extended slump in property sales, investment, and home prices last month has piled more pressure on authorities to step up efforts to prevent contagion across the broader financial sector.
China’s economy has struggled to get back on solid footing despite the lifting of strict COVID curbs late last year, largely because the property sector has stumbled from one crisis to another in a major blow to consumer and investor confidence.
Rescuing select developers will not be enough in itself to cushion the economic impact of the downturn, analysts say, arguing that Beijing should consider supplementing it with other steps, including boosting fiscal spending and further loosening of monetary policy.
Beijing needs to pull “multiple levers” at the same time to address the “vulnerabilities” in the financial system, local government financing, as well as consumer sentiment, said Edward Al-Hussainy, head of emerging market fixed income research at Columbia Threadneedle, which owns Country Garden bonds.
“When confidence is low, the only entity that can solve it is the government and I think the government has to solve it by being very aggressive, very visibly aggressive, with language like ‘whatever it takes’”, he said.
Shoring up confidence is the biggest challenge facing Beijing and is key to getting homebuyers spending again, which analysts says isn’t likely to happen soon given an uncertain economic outlook.
Investors got a brief respite last week after the largest state-owned shareholder of China Vanke stepped in to back the country’s No. 2 developer, with over $1.4 billion of “market tools”.
Separately, Reuters reported last week that the central government was working on a plan to bail out property giant Country Garden, whose worsening financial woes have renewed concerns about broader contagion risk.
In the last few months the government’s support measures for the property sector, which accounts for roughly a quarter of the Chinese economy, included easing curbs on home purchases and cutting mortgage borrowing costs.
Beijing has so far resisted a return to the big-bang stimulus of the past that led to a massive build up in debt which it is still struggling to unwind, while it fears large-scale monetary stimulus will hammer an already weakened yuan currency and intensify capital outflows.
Still, Morgan Stanley said in a report this week that Beijing was likely to step up central government-led fiscal stimulus, focusing on urban village rebuilding, social housing construction and green capital expenditure.
China’s Central Economic Work Conference next month is also expected to “signal a more flexible monetary policy”, it added.
‘ONE BIG HIT’
The property sector plunged into an unprecedented crisis in 2021 after a regulatory crackdown to rein in a debt-fuelled building boom tightened liquidity in the industry and sparked defaults among developers.
Reuters reported last week that Chinese authorities have asked domestic financial behemoth Ping An Insurance Group to take a controlling stake in Country Garden. That report was denied by Ping An.
The Chinese authorities may want to allow Country Garden’s rescue by Ping An to instil confidence in the sector, said Elliot Hentov, head of macro policy research at asset manager State Street Global Advisors.
“They recognise that none of the measures… like softening mortgage conditionality, liquidity provision – have been enough to restore confidence so they might feel like they need one big hit,” he said, referring to the Reuters report on the Country Garden bailout plan.
A government-led bailout of a distressed developer would be positive as it would reflect Beijing’s determination to defuse the debt crisis, restructuring experts, investors and developers say, though they reckon it would require careful manoeuvring to manage the impact on the white knight.
Regardless of the final outcome, senior executives at two mid-sized defaulted developers said the Country Garden deal would have little impact on them, as a government bailout would likely target only the systematically important firms.
“A deal could restore some investor confidence in the capital market. But a recovery in confidence in the property market will require people buying home, not rescuing a company,” said Steven Xu, president of Hong Kong-based Harmonia Capital.
“You need to fix the macro environment first; if you don’t earn enough how do you buy a property?,” said Xu, whose firm holds China property dollar bonds.
Bloomberg News reported on Tuesday China plans to provide at least 1 trillion yuan ($138 billion) of low-cost financing to the nation’s urban village renovation and affordable housing programs.
“The move, if true, indicates the regulator’s increasing stance to help the sector. We think that the policy will indirectly help to provide liquidity to developers,” GS-CIBM Securities head of China research Raymond Cheng.
Still, additional broad-based monetary policy easing was needed to facilitate the large amount of government bond issuance and improve sentiment toward growth, Goldman Sachs said in a note, referring to the new financing report.
Reuters