Beijing comes to the rescue of its real estate sector

published on Monday, November 14, 2022 at 11:11 a.m.

China has unveiled measures to revive real estate, a crucial sector for its growth but rendered bloodless by a tightening of financing rules and by the pandemic, which has placed many promoters on the verge of bankruptcy.

These new measures include in particular credit support.

The Asian giant has experienced a boom in the real estate sector since the liberalization of the market in 1998, in a country where the acquisition of property is often a prerequisite for marriage and an investment.

The promoters were able to develop at high speed thanks to bank loans. But their debt has swelled so much that the authorities have decided to put a stop to it from 2020.

Access to credit for developers has since shrunk considerably, while demand for real estate has taken a nosedive in China amid an economic slowdown and uncertainties related to Covid-19 restrictions.

Many real estate developers are now fighting for their survival, including the former heavyweight in the sector, Evergrande, strangled by a debt estimated last year at some 300 billion dollars.

Real estate is a key sector of the economy in China, which weighs with that of construction, around a quarter of GDP, and supports an army of low-skilled workers.

– “A turning point” –

In this context, the authorities established sixteen support measures on Friday, supposed to offer a breath of fresh air to the sector.

The central bank and the banking and insurance regulator did not make the new directives public, but the main lines were unveiled on Monday by the Chinese economic press.

The measures provide for the extension of maturities for debt-ridden promoters, encourage banks to lend more to financially sound groups and provide liquidity to complete ongoing projects.

Due to a lack of cash, some real estate groups have ended their work in recent months. And a growing number of furious owners have refused to honor their monthly payments, at the risk of aggravating the crisis and the defaults.

The measures unveiled by Beijing “guarantee” the return of goods and direct banks to provide “special loans” to achieve this end, according to a directive circulating online and cited by Chinese media.

This decision reflects a “turning point” taken by the authorities since their decision in 2020 to tighten access to credit for property developers, said economist Ting Lu of Nomura bank.

“These measures show that Beijing is ready to reverse most of its decisions,” Lu said.

However, it is “not a rescue” of the real estate sector, nuance analyst Andrew Batson, of the firm Gavekal Dragonomics, specializing in the Chinese economy.

“Banks are only encouraged to increase their financing to property developers who are not already in default. And (the authorities remind that) developers in difficulty are supposed to sell their assets,” he underlines.

– “Positive but…” –

The news caused the Hong Kong Stock Exchange, where many real estate groups are listed, to jump more than 3% on Monday. The place finally closed up 1.7%.

Shares of China’s biggest developer by sales, Country Garden, ended up 45%. That of Greenland, one of its competitors, gained more than 35%.

Already on Friday, China had announced the relaxation of several anti-Covid measures which are heavily penalizing the economy, including a reduction in quarantine for international arrivals.

The Asian country is the last major economy to maintain a strict health policy against the coronavirus.

This so-called “zero Covid” strategy results in confinement of neighborhoods or entire cities as soon as positive cases appear, compulsory and monitored quarantines for infected people, but also almost daily PCR tests.

It has significant implications for global supply chains and business morale.

The measures announced in recent days “are positive but do not constitute major reversals,” said Mr. Batson. Both for real estate and for the Covid, the power “is trying to make” its current policy work “rather than moving on to something (completely) new”.

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