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Why Beijing won’t save its real estate sector

Many Chinese developers have halted or delayed construction of pre-sold homes due to cash flow problems. Pictured here is a property construction site in Jiangsu province, China, on October 17, 2022.

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BEIJING ̵[ads1]1; China’s central government is unlikely to spend billions to rescue its struggling property sector, even as foreign investors hope for a massive bailout, analysts said.

A year after Chinese developer EvergrandeDebt problems began to rattle investors, the country’s real estate problems have only gotten worse. Some homebuyers refused to pay their mortgages due to construction delays, while property sales plunged. Once healthy developers are also struggling to repay debt.

“I doubt there will be direct bailouts for property developers from the government, although they can continue to ask the banks and [state-owned enterprises] to help select troubled developers,” said Tommy Wu, senior China economist at Commerzbank.

He expects that Beijing will want to gradually solve the problems in real estate and reduce the role of industry in the economy. Real estate and related sectors account for about a quarter of China’s gross domestic product.

“New rounds of measures in the coming weeks and months will still most likely continue to focus on supporting housing completions and stimulating home sales,” Wu said.

Why Beijing won’t save its real estate sector

S&P Global Ratings said in September it estimated the real estate market needs between 700 billion yuan ($98.59 billion) to 800 billion yuan “to ensure distressed developers can complete pre-sold housing.”

A state fund of similar size has not yet been announced.

That’s despite several reports, citing sources, of proposed funds. Some investment analysts expect such a fund, especially one significantly large enough to boost confidence.

Many developers are already struggling financially.

Total liabilities stated by Evergrande, Kaisa and Shimao was more than 2.6 trillion yuan by mid-2021, after which the three developers’ financial problems worsened. They make up only a fraction of the industry.

On that scale, even if the central government spent hundreds of billions of yuan, it would have little effect, said Qin Gang, executive director of China’s real estate research institute ICR.

We don’t expect to bail out the troubled developers, while the “market oriented” approach of supporting high quality developers can continue…

It does not take into account that the government is now far more strapped for cash compared to three years ago, he said, pointing to falling income from land sales and taxes, and increased spending on Covid measures.

China’s central government collected about 9.15 trillion yuan ($1.26 trillion) in total government revenue in 2021, according to the Ministry of Finance.

Revenue for the first eight months of the year was 6.36 trillion yuan, down nearly 10% from a year ago excluding tax credits.

Social perception

Public perception is also important, said Qin, who pointed out that people may be angry if the government helps the indebted developers.

The issue of delivering ready-made flats is very complex and requires local coordination to resolve, he added.

In recent months, the government cut mortgage rates and put local authorities in charge of solving property problems. Several cities also eased restrictions on home purchases this year.

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The Ministry of Housing and Urban-Rural Development stressed to reporters last month that government measures – special loans to promote the completion of housing – were aimed at supporting the cities that need them. No amount was mentioned.

Explosive growth in China’s real estate industry over the past two decades has seen tycoons unafraid to flaunt their wealth. In recent years, Beijing has emphasized reducing the national wealth gap.

Much of the property sector’s rapid growth was fueled by developers taking on debt. House prices rose, sparking fears of a bubble, while families were forced to take on debt to buy homes.

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A record-long slump

Based on Barclays’ analysis of quarterly property investment data, the Chinese property slump has now entered its 10th quarter – a record period of more than two years, the analysts said in an Oct. 13 report.

That contrasts with an average of four to five quarters for previous property declines in China, the report said.

At the moment, the biggest challenge to restoring confidence remains the weak economy and the drag on consumer and business activity due to the zero-Covid policy.

Tommy Wu

senior China economist, Commerzbank

A prolonged slowdown means Chinese will be less eager to buy homes and take advantage of their rising prices, the analysts said. This means falling sales for developers.

“We do not expect to bail out the troubled developers, while the ‘market-oriented’ approach of supporting high-quality developers can continue,” the Barclays analysts said, referring to measures such as government-backed guaranteed bond issuance.

The government’s stance

As an example of how state entities are expected to become increasingly involved, Evergrande’s Shenzhen unit announced in late September that it would partner with a state-owned enterprise to ensure home delivery.

The state has otherwise kept its focus on matters outside of property.

Many initially expected Beijing’s revival of a central bank lending tool this fall to help developers complete housing construction – but it turned out to be for infrastructure, Caixin reported this month, citing sources familiar with the matter.

People’s Bank of China did not respond to a CNBC request for comment.

“While more forceful support will help [real estate]at the moment, the biggest challenge to restoring confidence remains the weak economy and the drag on consumer and business activity due to the zero-Covid policy,” Commerzbank’s Wu said.

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