A slew of recent measures issued by China’s central government to rescue its property sector have, in PIMCO’s view, limited the downside risks to the country’s cyclical growth outlook.
In the latest boost for the industry, on 28 November, the China Securities Regulatory Commission (CSRC) opened up equity financing options for Chinese developers, including lifting a years-long ban on private share sales and allowing mergers and acquisitions.
This comes just over a fortnight after a 16-point property relief plan was jointly announced by the People’s Bank of China (PBoC) and China Banking and Insurance Regulatory Commission (CBIRC) to ensure the “healthy and stable” development of the sector. Measures include requiring banks to roll over their loans to the property sector, facilitating financing for developers, extending mortgage repayment periods for homebuyers, and lowering mortgage down payments.
After almost 16 months of downturn in its once-sizzling property sector, these policies offer the most comprehensive and concrete support from the central government so far to stave off the sector’s liquidity stress .
The distressed housing market, as well as frequent COVID outbreaks and subsequent strict pandemic controls, have been the key bottlenecks for China’s economic activities in the past 12 months.
We believe the new policies reveal a much more pragmatic approach by Continuity and Concrete Direction: Takeaways From Chinas 20th Party Congress , which has maintained economic development, especially high-quality growth, as its top priority. Policy adjustments have been swift, and we think this could provide some cyclical relief amidst longer-term headwinds.
Our baseline annual GDP growth forecast of about 3% for 2022 and 5% for 2023 supposes that further property market easing and additional refinements in pandemic policies will start in 4Q 2022, with a full exit in 2Q 2023. We think the recent announcements are broadly in line with our assumptions, although uncertainty remains as to the government’s next steps in terms of reopening the economy amid new COVID waves. Reopening is inevitable, which would ultimately help release pent-up demand and support the property market.
Meaningful support for China’s property sector
For two decades, the property sector’s exponential growth had been a key GDP growth driver for China until July 2021, when property sales abruptly slumped amid tighter government policy . An unprecedented wave of defaults and stalled projects has hit over-leveraged property developers, angering homebuyers who have threatened to boycott mortgage payments for pre-sold property projects.
In October, new home prices in 70 cities, excluding state-subsidized housing, fell 0.37% month-on-month, a 14th straight decline, according to the National Bureau of Statistics. Home sales dropped 23% from a year earlier, deepening from a 16% decline in the previous month, and property investment slumped 16% year-on-year, according to Bloomberg.
The latest 16-point government support package aims to bolster the beleaguered industry via credit support to both homebuyers and developers, as well as measures to ease liquidity stress for developers, such as:
- Banks are required to treat state-owned enterprises (SOE) and private-owned enterprises (POE) equally, and are encouraged to extend construction loans to meet the reasonable financing demand of both SOE and POE high-quality developers.
- Bank loans due within six months can be extended for a year.
- PolicyFootnote and commercial banks need to offer loans to ensure the delivery of stalled projects.
- Commercial banks are encouraged to provide M&A loans for quality developers to acquire projects from defaulted developers, and asset management companies are encouraged to explore M&A opportunities at the project level.
In addition to the 16 measures, the PBoC has also expanded a key financing program aimed at supporting bond issuance by private enterprises, including property developers. The initial size is estimated at 250 billion yuan (US$34.5 billion) worth of debt offerings by private firms. Some higher-quality private developers have confirmed receiving quotas of 15 to 20 billion yuan with credit backing from SOEs.
Will these measures be enough to rescue the sector?
In our view, better-run private developers who have stayed current on their debt will be the key beneficiaries of the latest policy support. We expect most of the surviving developers should be able to access the onshore bond market in the coming months. The access to onshore construction loans and the onshore bond market should substantially alleviate developers’ liquidity pressures.
Defaulted developers are unlikely to benefit as much, but timely project delivery and a gradually improving property market should offer more incentives for management to actively engage with bondholders on restructuring.
China’s exit from COVID controls are key to housing demand recovery. Homebuyer sentiment should gradually stabilize with more refinements of the zero-COVID policy and if China’s economic growth starts to improve. In addition, the increased funding to ensure the delivery of stalled projects would help strengthen homebuyer confidence. Property sales may remain weak in the coming months, but we expect gradual improvement especially in 2H 2023, after the economy fully reopens (as per our baseline forecast).
However, as winter arrives and infections continue to rise, the relaxations on COVID controls could ebb and flow before the country is ready to exit fully. China has stepped up efforts to prepare for this, including accelerating elderly vaccinations, greater investment in medical resources, and public health education. We expect to see gradual progress over the coming quarters, with China exiting from “dynamic zero-COVID” around 2Q 2023.
Implications for investors
While risks remain, these recent policy adjustments represent significant support for the property sector, particularly higher-quality private developers. We expect central government support to continue until there are clear signs of recovery, which will likely take more than six months.
We continue to focus on developers that we believe are more likely to survive the sector downturn, and are closely watching further policy developments and key signals for China’s re-opening.
To find out more about the road ahead for China’s new leadership team, read our recent blog, “Continuity and Concrete Direction: Takeaways From Chinas 20th Party Congress ”.
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