MNI EXCLUSIVE: China Property Surge To Survive Debt Scrutiny

Chinese property investment, a key driver of economic growth, should continue its surge this year despite increased official scrutiny of developers' borrowing, with some companies already facing a struggle to pay their liabilities but likely to seek to compensate for scarcer financing by boosting sales revenue via incentives for buyers, policy advisors told MNI.

"Property investment may grow 5-10% by the end of the year, possibly supported by robust home sales in the following months," said Li Yujia, chief research fellow at Guangdong Urban & Rural Planning and Design Institute, who advises the provincial government. Discounts and other incentives could spread from September, he said, noting that sales revenues provide more than 50% of developers' funds.

Sunday's announcement by the housing ministry and the People's Bank of China that new "fund monitoring and financing management rules" will tighten control of real-estate financing are compatible with market rumours that officials will set "three red lines" for companies, three policy advisors told MNI.

While no details have been provided so far, the rules are expected to cap developers' asset-liability ratios at 70%, net debt ratios at 100% and cash/short-term debt ratios at under 1. If a developer reaches one red line, annual growth in their debt can be no more than 10%, if they touch two, it must be restricted to 5%, and if they reach all three, borrowing must stay flat.

Some 51 out of 224 listed developers have already reached three red lines, Li calculates, while another 45 are on two and 60 have reached one. Two thirds or more of China's 96,000 developers have touched one or two lines, he said.

BOND MATURITIES

While sizeable property developers face significant bond maturities in the second half of the year, they should be able to roll them over, said Li. But Kuang Weida, director of the Urban and Real Estate Research Center at the National Academy of Development and Strategy, was more pessimistic, saying some larger firms might need to restructure debt, while smaller companies could face bankruptcy.

The new rules are likely to be long-term, as China shifts its focus to boosting local demand and upgrading its domestic economy, said a think tank researcher, asking to remain anonymous. An overheated housing market would crowd out consumption and innovation, the researcher said.

"It is not about tightening financing channels, but targeting individual developers," the researcher said.

"Property investment growth may retain its momentum in Q3, but it could slow in Q4 as the effect of these measures kicks in, so they would have only a limited impact for the whole year's figures," the researcher said. Property investment expanded by 3.4% y/y in the first seven months of the year, rebounding after the coronavirus outbreak and leading the economy's recovery.