MNI:China Seen Boosting Property Market, Not Bailing Out Firms

China seems inclined to deal with property developers’ debt risks using broad stimulus to boost home sales and ensure delivery of unfinished housing projects, rather than by bailouts which risk fomenting moral hazard, advisors told MNI after a warning over missed bond payments from Country Garden, formerly the country’s largest developer by sales.

Volatility is inevitable as developers cut overcapacity and move away from over-reliance on debt, said Li Yujia, chief research fellow at Guangdong Urban & Rural Planning and Design Institute. While the travails of Country Garden, with more than 60,000 employees and 33,000 suppliers, will impact market sentiment across the sector, direct financial support for companies would only serve as a temporary patch without a rebound in home sales which account for over 50% of developers’ revenue, he said.

“It is necessary to respect market mechanisms and laws… and to give full play to the principal of survival of the fittest which is the consistent logic when dealing with risk events of other developers,” said Li, pointing to how authorities dealt with one-time giant Evergrande whose default in 2021 unnerved global markets.

Rather than bailouts, authorities should boost property demand, which will require local governments to relax restrictions imposed in the past decade to cool market excesses, said Xie Yifeng, dean at China Urban Real Estate Research Institute and a Ministry of Housing and Urban-Rural Development consultant.

Last week, asked about Country Garden, a National Bureau of Statistics spokesman said that the “market adjustment mechanism” will run its course while housing policies were optimised.

Country Garden’s biggest problem has been weak home sales, said Xie, adding that the company should cut prices to speed sales of property assets while looking to extend or swap its debt and to seek new shareholders among state-owned companies.

According to its 2022 annual report, the company’s total debt was about CNY271 billion, with total debt net of available cash about CNY124 billion and a net gearing ratio at 40%. The company said earlier this month it expects to post a net loss of CNY45-55 billion for the first half of 2023.

“Self-rescue by developers mainly relying on asset companies, debt-to-equity swaps or debt restructuring has proved to be ineffective,” said Xie, “Without comprehensive policy support, it will be only a matter of time before more developers head toward delisting and bankruptcy.”

Authorities need to move quickly to temporarily suspend the “three red lines” rules restricting new borrowing by developers, while local governments and banks should implement calls from Beijing for lower loan and down-payment ratios for first-home buyers, tax relief for housing replacements and a loosening of loan restrictions, Xie said. (See: MNI: China To Boost Property Demand In Tier One Cities)