MNI: China Still Risks Wave Of Developer Default-Advisors

Moves by Chinese authorities to relax controls on the property market are proving insufficient to reverse a precipitous downturn, with a large chunk of the CNY680 billion in developers’ maturing bonds this year at risk of default in the absence of further official measures to ease restrictions on their financing, policy advisors told MNI.

Sales by China’s top 100 developers plummeted about 50% year-on-year in the first two months of 2022, despite moves by local governments to cut mortgage rates and downpayments, China Real Estate Information Corporation data shows. Sluggish home sales have compounded a borrowing crunch which has hit developers since the national government’s move last year to crack down on excessive leverage, with the top 100’s total financing sliding by about 58% both on a monthly and yearly basis in February to the lowest level since January 2018, according to CRIC.

“If there are no substantial measures to ease developers’ financing difficulties, about 50% of their maturing debts could face possible defaults,” said Feng Ke, head of the Research Center of Financial and Industrial Development at Peking University. A total CNY680.62 billion of developers’ bonds mature this year, according to Essence Securities.

Authorities could increase quotas for both property development and mortgage lending, and emergency loans could be made available to companies with a good credit record facing short-term liquidity problems, Feng said.

CAUTION IN WAKE OF EVERGRANDE

While the government has signalled a change of economic course this year, making renewed calls for credit expansion after growth slowed sharply in the fourth quarter of 2021, Feng said some banks are still risk-averse following the near-collapse of giant developer Evergrande. Banks have little incentive to lend to developers without government backing, he added, calling for regulators to tolerate a temporary increase in non-performing assets and to be less rigorous in holding lenders’ management to account.

State-owned companies could also take stakes in struggling developers, with a view to selling the shares when the market recovers, Feng said.

Local governments, for which land sales are an important source of revenue, have cut prices in the face of sagging developer demand, removing another driver of house prices, said Li Yujia, chief research fellow at Guangdong Urban & Rural Planning and Design Institute. With many Chinese buyers preferring rising markets offering the prospect of selling for more later, and middle-class purchasing power in particular sapped by lower income expectations during the pandemic, house price depreciation has continued despite significant easing of market controls in more than 40 cities in January and February, Li said. Price promotions by developers in the first two months of the year amid epidemic outbreaks also dampened buyers' expectations, Li said.

Both second-hand and new home prices have fallen since August 2021, with only bigger major cities seeing any modest rebound in March.

More lower-tier cities, and perhaps some first-tier suburbs, will further relax regulations to stimulate demand, said Feng, noting that Huadu district in Guangzhou has eased the purchase limit for migrant workers. Li agreed that “new citizens” from other parts of China who do not own property in their new residences will be key for cities looking to boost housing demand with lower mortgage rates and easier borrowing terms. With further relief policies in place, house prices could bottom out this month, said Li.