China’s real estate crackdown alarms analysts as economic risks rise
(Bloomberg) – Warnings that China’s campaign to cool its housing market will go too far are mounting.
Economists at Nomura Holdings Inc. call China’s “Moment Volcker” brakes that will hurt the economy. The credit crunch in the real estate sector is “unnecessarily aggressive” and could weigh on industrial demand and consumption, colleagues at Bank of America Corp. wrote. A prominent Chinese economist has warned of a potential crisis if home values fall below mortgages.
Stabilizing the Chinese real estate market under the mantra “housing is for living, not for speculating” is one of many campaigns Xi Jinping has waged as he seeks to reduce the cost of raising a family and defuse risks in the financial system. Yet it is also one of the most difficult goals to achieve given the vital importance of the sector to the economy – industry accounts for over 28% of gross domestic production.
Tighter regulation appears to be working, after monetary easing last year boosted price hikes. Home loans grew at the slowest pace in eight years in the first seven months of the year, according to the banking and insurance regulator, while house price growth fell to its lowest level in six month in July.
The efforts to enforce discipline among over-indebted real estate developers are also biting. Real estate companies defaulted on $ 6.2 billion in high-yield debt until mid-August, about $ 1.3 billion more than the previous 12 years combined, according to Morgan Stanley.
Yet there is growing concern that the impact of such policies is spiraling out of control. Nomura estimates that real estate restrictions account for more than half of the slowdown in economic growth in the second half of the year. Restrictions in the real estate market also affect the sale of building materials, furniture and appliances.
The reduced access to finance has exacerbated a liquidity crisis at China Evergrande Group. Moody’s Investors Service Inc. and Fitch Ratings both cut their ratings on the company more deeply this week, with the latter saying a default appears “likely.” Evergrande’s $ 305 billion in liabilities mean that any business failure poses a threat to the financial system.
“A rapid slowdown in real estate activity could have a significant ripple effect,” Miao Ouyang and Helen Qiao of Bank of America wrote in a note on Monday. “While the motivation for such a credit crunch was to stabilize leverage and rebalance the economy, the risk of growth instability increases in a context of rapid deleveraging.”
In recent months, China has targeted everything from mortgage approvals and rates for first-time buyers to growing rents in cities and the premium on land prices. Chinese banks are being asked to cut back on loans to homebuyers, and several major cities have recently suspended centralized land sales. Officials in May revived the idea of a national property tax.
“If one day the value of the houses fell below the mortgage value, people could not even pay off their debt by selling the houses, and it would be a real crisis for the real estate market”, Li Yang, president of the National Institution for Finance & Development, was cited by the official Economic Daily. Li spoke at a forum on August 29.
Perhaps the most visible change has been the tightening of financing conditions for highly leveraged developers, who rely on access to the bond market, bank loans, and fiat loans for liquidity. The once prolific offshore issuer Evergrande hasn’t sold a dollar bill since January 2020. Yields on junk Chinese dollar bonds, which are dominated by real estate companies, hit their highest level last week since the pandemic sparked a massive sell-off in March 2020.
Real estate companies accounted for around 30% of first half defaults and some of their bonds are now blacklisted as collateral both onshore and offshore. Ping An Insurance (Group) Co. said in August it set aside $ 5.5 billion in provisions related to its investment in failing China Fortune Land Development Co.
“Short-term markets need to be prepared for a marked slowdown in growth, more defaults and foreclosures, and perhaps stock market turmoil,” wrote Nomura economists led by Lu Ting in a report last month.
There are few signs so far that Beijing will withdraw its measures. According to Morgan Stanley, local governments can make adjustments based on their housing market conditions, but they will not be able to touch the “results” of home purchase restrictions and caps on house prices.
“One of the main objectives of these recent regulatory measures has been to reduce liquidity-related speculative flows in the Chinese real estate sector,” Morgan Stanley analysts led by Kelvin Pang wrote in a note last month. “We suggest investors exercise caution during this period of China’s real estate industry regulatory reset.”
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