MNI: Defaults Loom For Chinese Developers - Analysts

The liquidity squeeze on Chinese property developers is expected to trigger more debt defaults as the government seeks to rebalance a market left oversupplied after the last boom, with only modest financial support offered to backstop confidence during the transition, analysts said.

The over 20% y/y decline in home sales over the first eight months of the year, coupled with a contraction in financing through loans and bond issuance, could prove a toxic combination for cash-strapped developers struggling under debt repayment pressures.

Bail-out funds created to help prop up China’s ailing property market are viewed as more of gesture to boost confidence rather than substantial support aimed at bailing out embattled developers amid the deepening downturn.

There were 83 domestic real estate-related bonds totaling CNY127 billion in default as of September 28, according to Wind Information. Additionally, there were 2,801 project companies set up by developers with commercial bills overdue in August, according to China Real Estate Information Corporation. That’s a rise of 39.7% m/m and significantly higher than the average month-on-month growth of 16.8% from April to July.

FUNDING GAP

The CNY200 billion of special loans offered through policy banks to ensure property projects are delivered may not be enough to plug the gap of CNY400 billion that’s estimated to be needed to complete unfinished projects, wrote Changjiang Securities chief economist Wu Ge in a blog post.

The CNY30 billion fund set up by China Construction Bank this week to buy properties from developers and turn them into long-term rental housing is unlikely to make a material difference given its limited size, said Nicholas Zhu, Vice President and Senior Credit Officer at Moody’s. He noted that it took two months for the fund to be finally approved by the banking regulator, and that other state-owned banks may not follow suit due to caution among regulators.

Despite mortgage rate cuts and ongoing measures to relax home ownership limits, Zhu believes there is a reluctance among policymakers to restore the property sector to its former scale where it dominated China’s economy. Officials are determined to deal with the oversupply of housing, meaning they are willing to bear a higher short-term adjustment cost as long as it does not trigger systemic risks, he said.

The People’s Bank of China's move to allow some Chinese cities suffering ongoing declines in home prices to temporarily relax the floor on mortgage rates for first home buyers is viewed as conservative as it mainly applies to smaller cities and ends at the end of 2022.

Wu said the intensity of city-specific stimulus was not as strong as in the past, adding some local governments had cancelled relaxed home purchase limits within a day, an acknowledgment of President Xi Jinping’s belief that “houses are for living in, not for speculation”.

Housing demand will shrink over the long-term as the country’s living space per capita had risen quickly by 20 square meters to 40 over the past two decades, while China will face a declining population in three years, said Zhu.

BAD DEBT

Banks have curtailed lending to developers, with loan growth fluctuating at about 0%, said Zhu.

Citibank calculates bad debts climbed to about 29.1% of total property loans in H1, up from 24.3% at the end of 2021. Two of the big four state-owned commercial banks have watched their non-performing loan ratio related to corporate lending to the real estate sector rise over 5% in H1.

Banks are partly protected given they hold collateral, but that’s assuming there is no substantial drop in the value of land and properties triggered by a systemic crisis.