How far away is the “light at the end of the tunnel”?
Although regulators have announced many policies since March to support property sales, in September and through October’s Chinese “Golden Week” holidays (traditionally strong selling periods), we have seen property sales in major cities remain sluggish. With “for living, not for speculation” unchanged as the fundamental rule in regulating the sector, homebuyers refuse to buy in a down market with low confidence in both home completion and affordability, damaged by mortgage boycotts and regular city lockdowns. We expect the physical market recovery to remain mild and slow unless the confidence issues can be addressed.
Aiming to support the financing side, in August, the People’s Bank of China helped a few surviving private-owned enterprise (POE) developers to issue onshore SOE-guaranteed bonds. This followed the China Securities Regulatory Commission’s support in May of issuing bonds with credit default swap structures, hoping to restore the confidence of financial institutions and bring the bond refinancing of POE developers back to normal. However, the refinancing’s have been small in size at less than RMB1.5 billion, and are likely unsustainable, limiting the potential benefits.
As reported last week, the PBOC has asked six major banks to lend RMB600bn to developers, which we view as another positive attempt to avoid a full-blown hard landing. However, we think the policy is subject to execution risk.
With the marginal support, corporate liquidity remains very stretched, as shown by CIFI’s recent interest-payment miss on its convertible bond, shortly after it printed a RMB1.2bn guaranteed bond. Its default increased the danger of a contagious bank run for other POE developers amid worries about the owners’ willingness to repay their bonds.
In closing, we view restoring the confidence of stakeholders in the sector as key to stopping the current vicious cycle—weaker presales, weaker refinancing and mortgage payments boycotts, all of which have, in turn, led to more defaults. With divergent performance between SOEs and POE developers in recent months, we believe the landscape will continue to change, with SOEs (thought to be major players under the common prosperity scheme) taking more market share. However, we expect that sector vitality would weaken as a result, and that sector-wide profits margins will remain under pressure in the near term. The importance of the Party Congress meeting next week is particularly significant, as companies and investors hope for concrete government support for a sector that is on the verge of total collapse.
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