The Chinese property sector has fallen on hard times, as it seems, due to property developers taking on more work and more loans than they were able to deliver on, causing a spiral of defaults, ire, and pain for the entire economy.
On August 22, Chinese banks lowered their benchmark lending rates while authorities jumped in to offer support for the property market with additional loans. Yet, according to Fitch Ratings, these latest attempts to stabilize the Chinese property sector while avoiding any excessive stimulus could reignite home prices.
Furthermore, Fitch states that the central government used a three-pronged approach to alleviate the economic pain caused by the property sector, introducing policies targeting homebuyers, stalled projects, and developers not facing financial distress.
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Despite these policies, a strong recovery in the property sector does not appear to be on the cards for China.
Liquidity relief
China Bond Insurance Co., Ltd. pledged to guarantee bonds issued by a property developer, Longfor Group Holdings Limited, as a sign that the government is ready to prop up non-distressed private developers to avoid more defaults.
Though such policies do increase liquidity for developers, Fitch points out that the recovery in housing sales is the key to a sustainable improvement in developers’ liquidity more broadly.
Moreover, the latest five-year loan prime rate reduction could support housing demand by reducing borrowing costs; yet, Fitch argues that the homebuyers’ confidence will probably not be improved. Similarly, support for private developers in distress is limited, with a possible real estate fund scheme being set up, which will face challenges due to the insolvency of some developers.
In addition, certain government support aspects will rely on beneficiaries pledging valuable assets in return, which could further reduce recovery rates.
It seems that the road to recovery will be bumpy and will cause a drag on the Chinese economy. Government initiatives to help out distressed private firms could be a boon. Still, it can not happen without significant pain along the way, not just for the property sector but the broader economy.
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