China’s top real estate developers, Evergrande and Country Garden, have defaulted on their debts. But the issues in China’s property market have much deeper roots.
Desperate property developers in China have resorted to gifts like new cars, free parking spaces, phones and other consumer goods to attract homebuyers and boost flagging sales.
These incentives are just the tip of the iceberg in a crisis involving hundreds of billions of dollars in home builder debt, trillions in local government debt and at least a billion empty apartments.
But it wasn’t always the case. Since China’s economic liberalization in the 1970s and housing reforms in the late 1980s, locals have flocked to properties as the investment vehicle of choice over alternatives such as the stock market.
The property and construction boom helped fuel China’s – and the world’s – economic growth for 30 years. By some estimates, property in China was worth $60 trillion at its peak, making it the biggest asset class in the world.
As property values soared and Chinese households piled on more debt, Beijing attempted to cool its housing market and rein in risky business behavior. Spooked, Chinese consumers soured on property purchases.
But the country’s property crisis has deeper roots than speculation and uncontrollable debt. Watch the video to find out how China’s property bubble burst.
Commercial real estate markets in the U.S. and China are economic pain points to monitor in a higher-for-longer rate environment, said Singapore’s United Overseas Bank. But the bank remains optimistic about one key region.
“The U.S. commercial real estate remains a hotspot, especially with the low occupancy rates that we have,” Lee Wai Fai, chief financial officer of UOB told CNBC’s “Street Signs Asia.”
“The other hotspots will be China, there [are] worries about the quality and whether they can manage the property uncertainty in China,” he added.
China’s property market has struggled with faltering consumer confidence as major developers like Evergrande and Country Garden remain mired in debt problems.
Lee added the world is heading into a more “uncertain environment” and the impact of higher-for-longer interest rates is starting to filter through the economy.
The world’s central banks have hiked interest rates aggressively over the past 18 months or so in a bid to rein in soaring inflation, with varying degrees of success.
“China recovery has yet to come about. And of course, the recent geopolitical tension has added to the volatility,” he added.
That being said, in spite of a bumpy macroeconomic environment, Lee expects the ASEAN region to remain resilient, citing investment flows particularly in new economy areas such as sustainability.
“But [for] our regional fundamentals, we are confident, because we still have low unemployment and robust consumption,” he said, adding that supply chains are also shifting into Southeast Asia.
Foreign direct investment flows to Southeast Asia have “increased by a factor of nine over the last two decades, with over half of these going to Singapore,” philanthropic organization Hinrich Foundation noted in a February report.
All of Country Garden‘s offshore debt could potentially be in default if the Chinese property developer fails to make a $15 million coupon payment on Tuesday, which marks the end of a 30-day grace period.
The embattled real estate giant warned last week it may not be able to make all its offshore repayments, including those issued in U.S. dollar notes.
Once China’s largest real estate developer, Country Garden narrowly avoided default in early September after it managed to pay $22.5 million in bond coupon payments. Its creditors voted to extend repayments on six onshore bonds by three years.
Country Garden vs. Hang Seng Index
The founding family of Country Garden reportedly provided the company with an interest-free loan of $300 million, Reuters reported Friday, saying the family was trying to sell another jet to raise money.
If the Country Garden fails to make the repayment on Tuesday, it would become the latest casualty among many large Chinese real estate developers that have defaulted on their debt.
Chinese property giants including Evergrande and Country Garden have been hit by debt problems, hurting consumer confidence in the sector.
Shares of Country Garden rose 1.37% in early trade, tracking a 0.86% rise in the broader Hang Seng Index.
Signage at a residential project developed by Country Garden Holdings Co. in Baoding, Hebei province, China, on Tuesday, Aug. 1, 2023.
Bloomberg | Bloomberg | Getty Images
Chinese real estate developer Country Garden Holdings said it expects it will not be able to make all of its offshore repayments, including those issued in U.S. dollar notes.
The company failed to make a debt repayment of 470 million Hong Kong dollars ($60 million), as of Tuesday.
Country Garden warned that this could lead to creditors demanding faster repayments of debt or pursuing enforcement action. Shares of the company fell 1.19%, compared with the broader Hang Seng index which rose about 2%.
In early September, the company narrowly avoided default after it managed to pay $22.5 million in bond coupon payments and its creditors voted to extend repayments on six onshore bonds by three years.
Country Garden also recorded contracted sales of 6.17 billion yuan ($846 million) for September — the sixth straight month of decline and a decrease of 80.7% from a year ago.
Looking ahead, the company expects uncertainty in its liquidity position and asset sales in the short and medium term amid a lack of material, industry-wide improvement in property sales.
Chinese property giants such as Evergrande and Country Garden have been plagued by debt problems, hurting consumer confidence in the sector.
NANJING, CHINA – AUGUST 18, 2023 – Aerial photo shows a residential area of Evergrande in Nanjing, East China’s Jiangsu province, Aug 18, 2023. (Photo by Costfoto/NurPhoto via Getty Images)
Getty Images
Shares of Chinese property developer Evergrande as much as 82% on Wednesday, leading gains on the Hang Seng Index.
The stock has since pared its gains, but was still about 70% higher.
The real estate sector was the top gainer on the HSI, but the overall index was still in negative territory, dragged by health-care and industrial stocks.
Other stocks like Country Garden Holdings and Logan Group also surged, gaining as much as 26% and 28% respectively, while the Hang Seng Mainland Property Index was up about 4%.
The gains come after Country Garden reportedly managed to pay $22.5 million in bond coupon payments on Tuesday, narrowing avoiding default.
The bond payments were originally due in August, but Country Garden submitted the payments hours before a 30-day grace period expired.
China’s property sector has languished ever since Evergrande defaulted in 2021. Last week, the stock resumed trading and closed nearly 80% lower in its first session in 17 months. Evergrande shares had closed at 35 Hong Kong cents on Tuesday.
Other property stocks have also plunged in the past year amid contagion fears. Shares of Country Garden have fallen 53% so far this year while Logan dropped 18%.
On Wednesday, China’s state-owned Securities Times published a commentary calling for the lifting of “policies restricting property purchases in cities other than the hottest top tier cities” as soon as possible, according to a CNBC translation.
The commentary argued that “in the current situation where there are major changes in the demand-supply relationship in the property market, it is no longer appropriate to retain restrictive policies that were previously implemented to curb speculation.”
It concluded, therefore, there was an “urgent need” to increase policy support to boost sales, thereby releasing demand suppressed by these rigid housing policy.
A hiring sign is pictured at a McDonald’s restaurant in Garden Grove, California on July 8, 2022.
Robyn Beck | Afp | Getty Images
This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
More jobs but higher unemployment U.S. nonfarm payrolls for August increased by 187,000, above the 170,000 estimate. However, the unemployment rate jumped from 3.5% last month to 3.8%, the highest since February 2022. Average hourly earnings increased 4.3% year on year, below the forecast of 4.4%. Combined with the downwardly revised figures for June and July, those are clear signs the U.S. jobs market is slowing.
Electric vehicle moves Tesla shares slid 5% Friday after the company cut prices on its electric vehicles in both the U.S. and China. Meanwhile in Germany, BMW and Mercedes revealed EV concepts, representing their biggest push yet into the EV market. But that might not be enough to stop China’s dominance. Chinese EV companies all delivered enough vehicles in August to keep pace with their third-quarter guidance.
JPMorgan Chase and Jeffrey Epstein JPMorgan Chase notified the U.S. Treasury Department of more than $1 billion in transactions related to “human trafficking” by Jeffrey Epstein, a lawyer for the U.S. Virgin Islands told a federal judge. Those transactions dated back 16 years and were only reported after Epstein was arrested and killed himself in jail in 2019, said Mimi Liu, an attorney for the Virgin Islands.
[PRO]Slow start to September U.S. markets are closed Monday for Labor Day and economic data coming out this week is on the light side. The heavy hitters, like the consumer and producer price indexes, will only be released later in the month. So keep an eye out for these signs that will indicate whether stocks will fall prey to the September seasonality — the month’s historically been the weakest for stocks.
The U.S. economy added more jobs than expected in August, but the overall unemployment rate rose. This may sound counterintuitive since it’s natural to assume an increase in the number of jobs will lead unemployment going down. But there’s a simple explanation for that.
By definition, the unemployment rate is the number of unemployed people (people without a job but are actively looking for one), divided by the labor force (the sum of people both employed and unemployed), expressed as a percentage.
If the unemployment rate goes up, that means the proportion of people looking for a job compared with the total labor force has grown. That’s straightforward enough. For the unemployment rate to go up even as there were 187,000 more jobs in August means there were more people who started looking for a job than people who secured one. The implication: The total labor force grew in August. Indeed, 597,000 people without work experience sought employment last month, according to the report.
A growing labor force is a looser jobs market. That probably contributed to the lower-than-expected wage growth last month. As Bank of America U.S. economist Stephen Juneau wrote, “The broad message here seems to be that we are nearing full employment, with supply and demand coming more into balance.”
That will come as a relief to Federal Reserve officials worried about a hot jobs market contributing to inflation. Investors, too, cheered the jobs report. They think there’s a 93% chance the Fed will keep rates unchanged at its September meeting and a 65.3% chance at its November meeting, according to the CME FedWatch Tool. That’s up from 80% and 44.5% a week ago, respectively.
Major indexes rose in response to the jobs report as well. The S&P 500 climbed 0.18% Friday, giving it a 2.5% increase for the week — its best weekly performance since June. The Dow Jones Industrial Average added 0.33% to close 1.4% higher for the week. The Nasdaq Composite was essentially flat, but ended the week up 3.3%. That was both indexes’ best showing since July.
U.S. markets are closed today, so we’ll have to wait to see if they can sustain this momentum and defy September’s reputation as the worst month for stocks.
Residential buildings stand at the Metro Town development, jointly developed by CK Asset Property Holdings Ltd., Nan Fung International Holding Ltd. and MTR Corp., in Hong Kong, China, on Thursday, Jan. 11, 2018.
Anthony Kwan | Bloomberg | Getty Images
Hong Kong-listed property stocks surged on Monday, leading gains on the Hang Seng Index and powering the benchmark to be the top gainer in Asia.
Over the weekend, Country Garden won approval from its creditors to extend payments for a 3.9 billion yuan ($540 million) onshore private bond, according to sources and a document seen by Reuters.
Bloomberg reported the company also wired a coupon payment on a 2.85 million Malaysian ringgit ($613,000) denominated bond.
Country Garden is still scheduled to pay $22 million in coupon payments on two U.S. dollar bonds it missed in early August. The grace period ends Wednesday.
Some of China’s largest banks also cut interest rates on yuan deposits, including the Industrial and Commercial Bank of China, China Construction Bank Corp and Agricultural Bank of China.
Property management firm and affiliate Country Garden Services Holdings will also be removed from the Hang Seng China Enterprises Index. It will be replaced by online travel agency Trip.com.
The Hang Seng China Enterprises Index serves as a benchmark that reflects the overall performance of mainland securities listed in Hong Kong.
China’s real estate troubles are accelerating. Prospective home buyers are holding back on making purchases, leading to weak sales that compound the urgent need for policymakers to step up support for the industry.
New home sales for the top 100 developers dropped by about a third in June and July from a year ago, after double-digit growth earlier in the year, said Edward Chan, a director at S&P Global Ratings. With most apartments in China sold before they are completed, weak new home sales will likely lead to significant cash flow issues for developers.
“We think the situation is probably getting a little bit worse because of this Country Garden incident,” Chan told CNBC in a phone interview Thursday. He added he hasn’t seen any improvement in new home sales so far.
At a time when rafts of data are pointing to a rapidly slowing economy, this lack of improvement, along with Country Garden‘s looming default, is making it more difficult for property developers to raise funds.
Late Thursday in the U.S., the world’s most indebted property developer Evergrande filed for bankruptcy protection, further shaking up investor confidence.
The deepening crisis of confidence is adding to pressure on the world’s second-largest economy.
The debt troubles at Country Garden and the uncertainty of government support are feeding into broader unease in the Chinese housing market.
Louise Loo
Oxford Economics
The Chinese property sector has been reeling since 2020, when Beijing cracked down on the debt levels of mainland property developers.
Years of exuberant growth led to the construction of ghost towns where supply outstripped demand as developers looked to capitalize on the desire for home ownership and property investment.
These measures, known as China’s “three red lines” policy, point to three specific balance sheet conditions developers must meet if they want to take on more debt.
The rules require developers to limit their debt in relation to the company’s cash flow, assets and capital levels, with highly indebted developer Evergrande the first headline-grabbing default in late 2021.
A default by Country Garden could add $9.9 billion to the year-to-date global emerging markets high-yield corporate default tally, taking the total default volume for the Chinese property sector to $17 billion to-date in 2023, JPMorgan said in a note dated Aug. 15.
The U.S. investment bank expects China property to account for nearly 40% of all emerging market default volumes in 2023.
Much of Country Garden’s problems have to do with its outsized exposure to less developed parts of China known as lower-tier cities. About 61% of developments, according to the company’s 2022 annual report, are in these lower-tiered cities, where housing supply outstrips demand.
“Country Garden sales performance has been kind of disastrous,” S&P Global’s Chan said, noting that sales in June and July dropped by about 50% year-on-year.
Chan said that lower-tier cities started to see sales weakness in May, while higher-tier cities started to see sales worsen in subsequent months.
As a result of Country Garden’s troubles, Chan said it’s “becoming more and more challenging” for China’s overall real estate sales to reach S&P’s base case of 12 trillion yuan to 13 trillion yuan this year.
“Instead of an L-shape it could be a descending staircase,” he said.
Chan said S&P’s bear case for China’s property sector is for 11 trillion yuan in sales this year, and 10 trillion yuan for 2024.
That’s still only nearly half of what the country’s real estate market sales were at its peak 2021 — at 18 trillion yuan, according to figures Chan shared.
At their mid-year economic review meeting in July, China’s top leaders vowed to “adjust and optimize policies in a timely manner” for its beleaguered property sector.
To date, they have yet to clearly demonstrate their plan to adapt to “major changes” in the demand-supply dynamics in the property market.
“The debt troubles at Country Garden and the uncertainty of government support are feeding into broader unease in the Chinese housing market,” Louise Loo, lead economist at Oxford Economics, wrote in a note dated Aug. 11.
As China’s property sector consolidates amid the debt and credit malaise, state-owned developers are better positioned to grow than non-state ones.
State-owned developers saw contracted sales grow by 48% in the first seven months of this year from a year ago, while developers that were not state-owned saw sales fall by 19%, according to data from Natixis Corporate and Investment Banking.
This is enhancing state-owned developers’ ability to buy land from local governments since robust home sales are boosting their cash flow.
“Nowadays, 87% of the land purchases are by [state-owned enterprises], so how do you expect [privately owned enterprises] to grow further?” Gary Ng, a senior economist at Natixis, said in a phone interview Tuesday.
For this year through July, 87% of land purchases by value were by state-owned developers, similar to last year, Natixis data showed. That’s up sharply from 59% in 2021, the data showed.
Ng expects state-owned developers to have greater ownership in China’s real estate market going forward. But he said that while non-state-owned developers have had leverage problems in the past, having so many state-owned developers in the industry might make it more difficult to forecast actual demand.
Still, underlying housing demand in first-tier cities remains somewhat resilient and untapped, and may be unleashed once there’s greater policy clarity.
“Timely policy in stabilizing the demand and sales in the higher-tier cities would be very important,” said Chan from S&P Global.
“If that could be achieved then over time, the stabilization could be spilled over to the lower-tier cities. But that will take an even longer time.”
This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
Beset by worries Major U.S. indexes tumbled, weighed down by losses in financial stocks and worries over China’s faltering economy. Asia-Pacific markets followed Wall Street and fell Wednesday. Most regional indexes lost at least 1%. A silver lining: Japanese business’ sentiment climbed in July, alongside the country’s stronger-than-expected economic growth.
Potential banking downgrade Fitch Ratings warned it may downgrade the U.S. banking industry’s credit rating from AA- to A+. Since individual banks cannot be rated higher than the industry, major banks like JPMorgan Chase and Bank of America would be cut to an A+ rating — with a trickle-down effect for smaller banks — if the downgrades happens. Fitch’s warning comes as Moody’s downgraded 10 banks last week.
Higher risk of corporate defaults There’s a higher chance corporate debt in emerging markets might default, according to JPMorgan. The bank raised its forecast for high-yield defaults in Asia from 4.1% to 10% — but that figure drops to just 1% if China property is excluded. That’s a sign of how severe the contagion risk is if Country Garden, the beleaguered Chinese property developer, defaults.
U.S. consumer strong as ever U.S. consumer spending in July remained healthy, according to data from the Commerce Department. Seasonally adjusted retail sales rose 0.7% for the month; economists were expecting 0.4%. Excluding autos, sales rose 1% against a 0.4% forecast. Both figures were the best monthly gains since January, reinforcing sentiment that the consumer can continue supporting economic growth.
[PRO] Stocks are still ‘overvalued’ Despite the sell-off in stocks the last two weeks, U.S. markets have rallied so much this year that stocks are still “overvalued and overextended,” according to Morningstar’s chief U.S. market strategist. It’s a good time to sell these six stocks to lock in profits — and buy five cheap ones, he said.
After Fitch warned that it might downgrade the banking industry’s credit rating, shares of big U.S. banks fell. Bank of America lost 3.2%, JPMorgan declined 2.55% and Wells Fargo slid 2.31%.
Regional banks weren’t spared the slaughter, either. The SPDR S&P Regional Banking ETF fell 3.33% after Minneapolis Federal Reserve President Neel Kashkari spoke in favor of “significantly further” capital requirements for banks with more than $100 billion in assets. Kashkari also emphasized that if inflation rebounds, rates might have to go higher and “pressures [in regional banks] could flare up again.”
But not everyone’s worried about Fitch’s warning. “The U.S. bank system is overall sound,” said Eric Diton, president and managing director at The Wealth Alliance.
“All Fitch was saying was: ‘If we did downgrade the sector again, that would lead us to have to downgrade a lot of the individual banks,'” Diton said. “Maybe they will, maybe they won’t.”
Banking doldrums aside, there were two bright spots in the initial public offering arena. Shares of VinFast, a Vietnamese electric vehicle company, surged from $10 per share to $22 in its debut on the Nasdaq; prices continued rising throughout the day to close at $37.
Meanwhile, Cava shares jumped 9.44% in extended trading after its first earnings report since its IPO in June. Taken together, they suggest that the IPO market is returning to health.
Still, major indexes couldn’t shrug off worries over banks and China. The S&P 500 slipped 1.16%, ending the day below its 50-day moving average for the first time since March — possibly heralding the start of a continued slide. The Dow Jones Industrial Average lost 1.02%, breaking its three-day winning streak. The Nasdaq Composite fell 1.14%.
If indexes continue sliding, that’d be their third consecutive losing week. Investors are hoping it’s a brief summer spell, a moment of correction that will end as the weather turns.
Country Garden Holdings Co.’s Fengming Haishang residential development in Shanghai, China, on Tuesday, July 12, 2022.
Qilai Shen | Bloomberg | Getty Images
Shares of beleaguered Chinese real estate company Country Garden Holdings slumped to an all-time low on Friday as the company issued a profit warning a day earlier.
The stock fell to an intraday low of 90 Hong Kong cents, extending the company’s losing streak after eight sessions of losses in the past nine days. This included a 14.3% plunge on August 8.
The sell-off in Country Garden shares also spilled over to the wider property sector.
The broader Hang Seng Mainland Property Index was 1.49% lower in afternoon trade on Thursday. Shares of counterpart Longfor Group were down 1.9%, while China Resources Land saw its shares slide about 1%.
In a filing to the Hong Kong exchange, the company said it expects a record a net loss of about 45 billion yuan to 55 billion yuan (or about $6.24 billion to $7.63 billion) for the six months ended June. That’s compared with the 1.91 billion yuan profit for the same period last year.
Country Garden said it’s “mainly due to the decrease in gross profit margin of the real estate business and the increase in impairment of property projects as a result of the decline in sales in the real estate industry.”
Expected foreign exchange losses also contributed to the drop in net income, it said.
Attributable sales from January to July is estimated to come in at 140.8 billion yuan ($19.51 billion) —that’s a year-on-year decrease of 35%, and a 61% drop compared to the same period in 2021.
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Earlier this week, Country Garden saw a sell-off after reports said the real estate firm had missed two bond coupon payments totaling $22 million over the weekend.
An investor relations representative for Country Garden did not deny the media reports, but also did not clarify the company’s payment plans, according to Sandra Chow, co-head of Asia Pacific Research for CreditSights, which is a unit of Fitch Group.
The broader Hang Seng Mainland Properties Index rose as much as 4.76%, but later moderated its gains.
The PBOC meeting on Thursday was attended by representatives of eight companies, including Longfor and Country Garden, the central bank said in a statement. Other attendees included diary giant Yili Group, aluminum products manufacturer China Hongqiao Group and electrical components manufacturer Chint Group.
At the symposium, PBOC governor Pan Gongsheng said the central bank will promote the expansion of private business bond financing support instruments, and strengthen the financial market to support their development.
This is the latest move by the central government to boost market confidence and vow support for private businesses and the real estate sector amid signs of slowing growth.
At the Politburo meeting on July 24, the top leadership promised to “adjust and optimize policies” to boost the beleaguered property sector, as well as introduce measures to promote private investment.
Separately, China’s state planner, the National Development and Reform Commission, also released a 17-point statement, and pledged to encourage more private capital into the construction of major national projects.
Days before, the government and the Communist Party issued a rare joint pledge vowing to treat private companies the same as state-owned enterprises, and ensure fair treatment in areas like intellectual property, financing and labor supply.
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In the latest measures released Thursday, the PBOC said China’s Interbank Market Dealers Association will continue to increase the bond financing support tools to “accelerate the innovation of the bond market,” and “meet the diversified financing needs of private enterprises.”
Pan urged financial institutions to “actively create a good atmosphere” to support the development and growth of private firms and understand their needs better.
“It is necessary to accurately implement differentiated housing credit policies, meet the reasonable financing needs of private real estate enterprises, and promote the stable and healthy development of the real estate industry,” the PBOC said, according to a Google translation.
BEIJING — China’s housing ministry has announced plans to make it easier for people to buy property.
The news, out late Thursday, indicates how different levels of government are starting to act just days after Beijing signaled a shift away from its crackdown on real estate speculation.
related investing news
The planned measures include easing purchase restrictions for people wanting to buy a second house, and reducing down payment ratios for first-time homebuyers, according to an article on the Ministry of Housing and Urban-Rural Development’s website.
In an effort to reduce speculation in its massive property market, China has made it much harder for people to buy a second house.
Mortgage rates for the second purchase can be a full percentage point higher than for the first, while the second-home down payment ratio can skyrocket to 70% or 80% in large cities, according to Natixis.
The housing ministry article referred to comments from its minister Ni Hong at a recent meeting with eight state-owned and non-state-owned companies in construction and real estate.
Since it was a meeting at the central government ministry level, it did not discuss policies for individual cities, said Bruce Pang, chief economist and head of research for Greater China at JLL.
But he expects Beijing will encourage local governments to announce real estate policy changes that fit their specific situation. Pang also pointed out that including construction companies at the meeting emphasized their role in promoting investment and stabilizing growth.
China has not yet announced formal measures for supporting real estate. However, top level leaders on Monday signaled a greater focus on housing demand, rather than supply.
We continue to expect the property sector rally to continue and advise investors to focus on beta names within the property sector.
The readout of Monday’s Politburo meeting also removed the phrase “houses are for living in, not speculation,” which has been a mantra for Beijing’s tight stance and efforts to rein in developers’ high reliance on debt for growth.
“It seems to us that [the housing ministry] is quick in response this time and also gets bolder on relaxing property policies,” Jizhou Dong, China property research analyst at Nomura, said in a note Friday.
Given such speed, Dong expects markets are anticipating specific policy implementation in cities such as Shanghai or Guangzhou.
“We continue to expect the property sector rally to continue and advise investors to focus on beta names within the property sector,” Nomura’s Dong said.
Those stocks include U.S.-listed Ke Holdings, as well as Hong Kong-listed Longfor and China Overseas Land and Investment, the report said, noting Nomura has a “buy” rating on all three.
“We still advise investors to stay away from weaker privately-owned developers.”
A Nanjing Road pedestrian street on October 1, 2022 in Shanghai, China.
Yan Daming | Visual China Group | Getty Images
Chinese stocks soared Tuesday as Beijing pledged to ramp up measures to bolster China’s sputtering economy.
Hong Kong’s Hang Seng Index surged more than 3%, China’s tech-heavy ChiNext rose 1.8% and the Shanghai Composite Index increased 1.81% on Tuesday morning in Asia.
A day earlier, Chinese real estate stocks tumbled on renewed debt fears. The Chinese government cracked down on the property sector’s debt levels in August 2020.
The stock rebound comes after China’s top leaders pledged on Monday to ramp up policy support to boost domestic consumption as the post Covid rebound has been slower than expected.
China’s top leaders met Monday for the much-anticipated Politburo meeting and hinted at moves to “adjust and optimize” property policy in what the leadership called a “torturous” economic recovery.
State news agency Xinhua quoted the 24-member Politburo as saying “the economy is facing new difficulties and challenges.” That’s mainly due to weak domestic demand, operational challenges for companies as well as “a grim and complex external environment,” it said.
“The meeting emphasized that it is necessary to actively expand domestic demand, give full play to the basic role of consumption in driving economic growth, expand consumption by increasing residents’ income,” according to Xinhua.
“It is necessary to boost the consumption of automobiles, electronic products, and home furnishing, and promote the consumption of services such as sports, leisure, and cultural tourism,” said the report.
Hong Kong-listed shares of internet giants rose on Tuesday. Alibaba shares soared 4.7%, while Tencent was up nearly 4%. Meituan and Baidu shares were higher by 5.7% and 6.8% respectively.
In the electric vehicle space, Xpeng soared 11%, Li Auto was up 4.15% and BYD rose 2%.
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“This is a reconfirmation that the [Chinese] policymakers have heard the market concern on more support needed for the domestic economy,” said Xiaolin Chen, head of international at KraneShares, on CNBC’s “Street Signs Asia” Tuesday.
“They want to achieve the 5% GDP target of this year. The first job they need to do is to create jobs for the labor force in China,” said Chen.
“I do certainly see some encouraging language released from the statement that removed a lot of the concerns of people having a high focus on real estate market, employment, private investment, and so on. So far, the language has been encouraging.”
In November, China’s financial authorities rolled out a 16-step guideline to shore up its housing sector, and “relevant policies” will now be now extended to the end of 2024, the People’s Bank of China announced.
Xinhua reported that the move is to “guide financial institutions to continue deferring loan payments for real estate enterprises, while propping up financial support for the real estate enterprises to ensure the delivery of housing projects.”
BEIJING — China needs to do more in order to fix its real estate problems, the International Monetary Fund said Friday.
The property market contributes to about a quarter of China’s GDP and has been a drag on growth, especially since Beijing cracked down on developers’ high reliance on debt in 2020.
“Authorities’ recent policy measures are welcome, but in our view additional action will be needed in order to end the real estate crisis,” Thomas Helbling, deputy director in the IMF’s Asia Pacific Department, said in a briefing.
“If you look at the measures, a lot of them address financing issues for the developers that are still in relatively good financial health, so that will help,” he added in an interview with CNBC. “But the problems of the property developers’ facing severe financial difficulties are not yet addressed. The issue of the large stock of unfinished housing more broadly is not yet addressed.”
Chinese authorities subsequently emphasized the need to help developers finish building those pre-sold apartments. Still, residential floor space sold in China dropped by nearly 27% last year, while real estate investment fell by 10%, according to official numbers.
“I think it would be helpful to point to a way out and … how the restructuring could be done and who will absorb losses if there are any losses,” Helbling said. He also called for additional measures to address the large stock of unfinished apartments.
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“Otherwise the sector will continue to slump and remain a risk and also constrain households that are overexposed to the property sector, and will have cash tied up and their savings tied up which will be a handicap for the broader economic recovery,” he said.
Helbling declined to name a specific timeframe within which authorities needed to act before the situation got much worse.
“The sooner you address downside risks the better.”
The IMF analysis was part of the organization’s latest report on China, following annual discussions with Chinese officials that ended in November.
The officials pushed back on the IMF’s real estate assessment, according to a statement in the IMF report by Zhengxin Zhang, executive director for People’s Republic of China, and Xuefei Bai, senior advisor to the executive director, dated Jan. 12.
China’s property market has generally operated smoothly and “is not in a ‘crisis’ situation,” the statement said, casting the sector’s situation as “a natural evolution of ‘deleveraging and destocking’ in the past few years.”
“The related risks are local and only concern individual firms, and their impact on the rest of the world has been relatively small,” the central bank representatives said. Looking ahead, the Chinese side said they would work toward ensuring the delivery of completed apartments, and merging developers.
Chinese property developers such as Country Garden, Longfor and R&F Properties have seen their shares nearly double or more over the last 60 trading days — about three months, according to Wind Information. But trading in shares of one-time giants Evergrande, Shimao and Sunac have been halted since March 2022.
The IMF report pointed out that a significant portion of investors in Chinese developers’ bonds have been affected.
“As of November 2022, developers that have already defaulted or are likely to default — with average bond prices below 40 percent of face value — represented 38 percent of the 2020 market share of firms with available bond pricing,” the report said.
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“The sector’s contraction is also leading to strains in local governments. Falling land sale revenues have reduced their fiscal capacity at the same time as local government financing vehicles (LGFVs) have also significantly increased land purchases.”
Shoppers walk through a street market in Hong Kong, China, on Sunday, Jan. 30, 2022. Photographer: Chan Long Hei/Bloomberg via Getty Images
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Hong Kong stocks kicked off 2023 with the most gains they’ve seen in the first trading session of a year since 2018.
The Hang Seng index on Tuesday gained 1.84%, or 363.88 points — its biggest first-day gain since January 2018, when the index rose nearly 2%.
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That signaled an improved outlook as China continues to reopen despite a nationwide surge in Covid infections.
“While it is inevitable to see further surges and more widespread in inflection at the initial stage of opening, the outlook for the Chinese economy has brightened for 2023,” Redmond Wong, Saxo Capital Markets greater China market strategist, said in a note.
“In addition to the reopening, China has intensified its effort to support the distressed property sector and given property developers access to credits and equity financing which had been denied to them for the most part of 2022,” Wong wrote.
Property and technology stocks continued to lift the Hang Seng index, which rose more than 3% in Wednesday’s session. The index exceeded 20,600, the highest level it’s seen since July 29, according to Refinitiv data.
The moves followed reports of Chinese officials planning to provide further policy support for ailing real estate developers.
Technology stocks also rallied, with shares of Alibaba rising 8% after Chinese regulators approved Ant Group‘s plan to more than double its registered capital, a sign of progress in resolving regulators’ concerns.
Electric vehicle maker Baidu rose more than 8%; Chinese video and gaming app Bilibili gained nearly 9%; Netease rose more than 5%; JD.com climbed 7%; and Tencent also rose around 4%.
The Hang Seng rally came after Chinese Finance Minister Liu Kun told Xinhua in an interview that there will be more fiscal policy support.
Shoppers purchase festive sweets ahead of Lunar New Year at a street stall in Hong Kong, China, on Sunday, Jan. 30, 2022. Photographer: Chan Long Hei/Bloomberg via Getty Images
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The government will work on expanding and improving the “effectiveness of the proactive fiscal policy to cope with multiple challenges ahead,” the minister was quoted as saying.
Chinese investment bank Guotai Junan Securities said the performance of Hong Kong stocks will affect the wider global market.
“The Hang Seng Index may lead other major global stock indices in 2023, with around 30% expected return,” analysts at the firm said in a Wednesday note.
“The index valuation may see further rerates, and we expect the HSI to recover to its previous level before Jun. 2022,” they said in the note.
China’s reopening is a positive sign for Asian stocks and global economic growth in 2023, but it carries also inflationary risks, thanks to China’s role in driving demand for the global commodities market, analysts at Raymond James said in a note.
Weaker growth in the Chinese economy will likely increase the chances of a more dovish Federal Reserve, while stronger growth will raise the possibility of a “stubbornly hawkish Fed,” equity strategist Tavis McCourt wrote.
“Volatility seems certain with equities finishing either modestly higher or modestly lower depending on the rate path,” McCourt said in the note.
China’s housing prices fell in October due primarily to falling prices in less developed, so-called Tier-3 cities, according to Goldman Sachs analysis of official data.
BEIJING — China’s real estate sector isn’t yet poised for a quick recovery, despite a rally this month in stocks of major property developers.
That’s because recent support by Beijing don’t directly resolve the main problem of falling home sales and prices, analysts say.
Last week, property developer stocks surged after news the central bank and banking regulator issued measures that encouraged banks to help the real estate industry. It comes alongside other support measures earlier this month.
Shares of Country Garden, the biggest Chinese developer by sales, have more than doubled in November, and those of Longfor have surged by about 90%. The stocks have already given back some of this month’s gains.
Meanwhile, iron ore futures surged by about 16% this month — Morgan Stanley analysts say about 40% of China’s steel consumption is used in property construction.
The situation is one of “strong expectations, but weak reality,” and market prices have deviated from the fundamentals, Sheng Mingxing, ferrous metals analyst at Nanhua Research Institute, said in Chinese translated by CNBC.
Sheng said it’s important to watch whether apartments can be completed and delivered during the peak construction period of March and April.
This really is a temporary relief in terms of the developers having to meet less debt repayment needs in the near future…
The new measures, widely reported in China but not officially released, stipulate loan extensions, call for treating developers the same whether they are state-owned or not and support bond issuance. Neither regulator responded to CNBC’s request for comment.
“This really is a temporary relief in terms of the developers having to meet less debt repayment needs in the near future — a temporary liquidity relief rather than a fundamental turnaround,” Hong Kong-based analyst Samuel Hui, director, Asia-Pacific corporates, Fitch Ratings, said Wednesday.
“The key is that we still need the fundamental underlying home sales market to improve,” he said, noting homebuyer confidence relies on whether developers can finish building and delivering apartments.
Earlier this year, many homebuyers refused to continue paying mortgages on apartments when construction was delayed. Homes in China are typically sold ahead of completion, generating a major source of cash flow for developers.
Analysts differ on when China’s property market can recover.
Fitch said a timeline “remains highly uncertain,” while S&P Global Ratings’ Senior Director Lawrence Lu expects a recovery could occur in the second half of next year.
“If this policy is implemented promptly, this will stop the downward spiral to the developers, this will help to restore the investors’ confidence [in] the developers,” he said.
Residential housing sales for the first 10 months of the year dropped by 28.2% from a year ago, the National Bureau of Statistics said last week. S&P Global Ratings said in July it expects a 30% plunge in sales for 2022, worse than in 2008 when sales fell by about 20%.
A slowdown in economic growth, uncertainty about ongoing Covid controls and worries about future income have dampened appetite for buying homes.
Adding to those worries are falling prices.
Housing prices across 70 cities fell by 1.4% in October from a year ago, according to Goldman Sachs analysis of data released Wednesday.
“Despite more local housing easing measures in recent months,” the analysts said, “we believe the property markets in lower-tier cities still face strong headwinds from weaker growth fundamentals than large cities, including net population outflows and potential oversupply problems.”
The report said housing prices in the largest, tier-1 cities rose by 3.1% in October from September, while Tier-3 cities saw a 3.9% drop during that time.
The property sector, including related industries, accounts for about a quarter of China’s GDP, according to analyst estimates.
“I think the real estate sector will become lesser of a drag to the economy in 2023,” Tommy Wu, senior China economist at Commerzbank AG, said Wednesday.
“It is too early to tell whether the measures rolled out so far will be enough to rescue the real estate sector,” he said. “But it feels more assuring now because it seems more likely that more forceful measures will be rolled out if the real estate downturn still doesn’t turn around meaningful in the coming months.”
Ultimately, China’s real estate industry is undergoing a state-directed transformation — to a smaller part of the economy and a business model far less reliant on selling apartments before they’re completed.
The property market has shrunk by roughly one-third compared to last year, and will likely remain the same size next year, S&P’s Lu said.
State-owned developers have fared better during the downturn, he pointed out.
In the first three quarters of the year, Lu said sales by state-owned developers fell by 25%, compared to the 58% sales decline for developers not owned by the state.
And despite recent policy moves, Beijing’s stance remains firm in dissuading home purchases at scale.
Whether it’s messaging from the National Bureau of Statistics or the People’s Bank of China, official announcements this month reiterated that houses are for living in, not speculation — the mantra that marked the early beginnings of the real estate market slump.
