News report

China’s real estate rebound is unstable

A pedestrian walks on an overpass near residential buildings and a surveillance camera, ahead of the annual National People’s Congress (NPC), in Shanghai, China February 24, 2022. Picture taken February 24, 2022. REUTERS/ Aly Song – RC29QS9SJ2C1

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HONG KONG, March 22 (Reuters Breakingviews) – The recent easing of official pressure on China’s property sector is less reassuring than it might seem. Battered property stocks surged last week on promises from regulators to stabilize the sector. read more But bond investors are less confident and defaults continue apace.

Chinese economic czar Liu He’s reassuring comments promising less political volatility and more market-friendly measures last Wednesday sparked a massive and broad-based rally on Chinese stock markets. The benchmark CSI300 index of major companies listed in Shanghai and Shenzhen has risen more than 6% since the speech.

Liu also reported increased support for the housing market, and though he was thin on specifics, state media reported soon after that the dreaded property tax trial had been delayed. Hang Seng Mainland property index increased 30%; even shares of China Evergrande (3333.HK), the poster child for the mainland’s indebted promoters, are up slightly year-to-date – although trading has been halted since Monday. Read more

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The reaction of bond investors was much more muted. Indexes tracking Chinese high-yield developer issues rose slightly but remain deeply depressed. It makes sense. Minor easing measures at the municipal level, mainly focused on mortgage restrictions, have revived speculative interest in major cities like Shanghai. But difficult financing conditions persist at the national level. Developers still have to manage about $32 billion in offshore bonds maturing later this year, according to Moody’s analysts, and earnings are under pressure. Sunac China (1918.HK), based in Tianjin, for example, estimated that its annual net profit fell by 85% in 2021. Evergrande and its rival Shimao (0813.HK) both delayed the publication of audited financial statements.

The root of the problem is the central bank’s “three red lines,” which cap developer debt-to-cash, debt-to-asset, and debt-to-equity ratios. They were introduced in 2020 to reduce industry costs exorbitant debt levels, and they pushed developers like Evergrande to restructure. This crisis is not over. Liu’s comments could be a tacit call for more easing at the margins. But that won’t automatically drive buyers back to markets where prices are stagnating or falling, especially with the resurgence of Covid-19 in mainland cities.

Official data showed China had 7.8 billion square meters of unfinished projects in February. The sight of major developers defaulting on their debts is also causing buyers to fear they may not be able to complete pre-sold apartments. Without more decisive political support, investor relief is premature.

Chart: Chinese property stocks rallied, but bonds saw less relief

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BACKGROUND NEWS

– The Chinese government must reduce the risks facing real estate developers, according to a meeting of the Financial Stability and Development Committee convened by Vice Premier Liu He on March 16.

– On the same day, China’s banking and insurance regulator said it would seek to stabilize land and house prices and encourage M&A lending to buy up troubled real estate assets. The finance ministry will suspend a property tax trial scheduled for this year, the official Xinhua news agency reported.

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Editing by Pete Sweeney and Katrina Hamlin

Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and to www.breakingviews.com. All opinions expressed are those of the authors.