Toh judge the high-rise buildings along the seafront in Haiyang, a small seaside town, the prospects from Country Garden are pretty bleak. The company, China’s largest developer by revenue, has sold few beachfront condos. A handful of towers appear only partially built. A mock German village with peaked roofs houses shops and restaurants and adds a bit of flair. But it is also almost empty. The company’s failure to sell homes became apparent as its earnings for the first half of 2022 almost entirely evaporated.
Country Garden isn’t the only Chinese developer to have faced difficulties. The volume of space sold across the country fell 24% in 2022, the biggest drop since data became available in 1992; Real estate investment fell 10% year-on-year, the first decline on record. Cross-border payment defaults are also proving difficult. Evergrande, the world’s most indebted developer that collapsed in 2021, has still not presented a restructuring plan originally due in July. The company’s auditor, PwC, resigned on January 16. This decrease in activity was disastrous for China’s economywhich gets around a fifth of its growth from the industry.
Officials in the country are currently reshaping policy on a large scale. The government has leaving its “zero Covid” approach to the pandemic while signaling an end to the crackdown on tech companies. Politicians are also trying to save the real estate sector. After two years of forcing developers to deleverage — which has caused dozens to default — regulators are now abandoning many of those measures in hopes of reviving sentiment. This has led to some optimism. Despite the bleak outlook in Haiyang, Country Garden’s share price has tripled since October.
The exact contents of the government’s reforms remain unclear. On Jan. 13, officials presented a draft 21-point plan that said the goal was to provide liquidity to “good quality” developers. The task now is to distinguish between these companies and bad ones: no clear definition of what constitutes good quality has been given. The plan will also force political banks to lend to stalled projects and state asset managers to provide credit for mergers and acquisitions. Commercial banks that had pulled out of the real estate business were instructed to start lending again to reliable developers. Meanwhile, state media are reporting that the “three red lines” policy, which limits debt, is being eased for 30 unnamed firms.
Businesses began rapidly raising new debt in December – a sign that policy easing began well before the government announced the new measures. Local authorities have cut mortgage rates and many are now at record lows. The state bailouts are aimed at unfinished buildings. About 60% of homes sold between 2013 and 2020 are believed not to have been handed over to buyers, many of whom have nevertheless begun making payments. Without funding, construction projects have stalled and cannot be completed. Fear of unfinished homes has reduced demand.
The state also wants to avoid further messy defaults. Country Garden made a last-minute payment to bondholders on Jan. 17. This has been made possible by the support of local governments, something that few companies other than the big and important ones like Country Garden currently have. About 950 billion yuan ($140 billion) in offshore dollar debt will mature this year alone, up from 810 billion yuan last year, according to Refinitiv, a data company.
The plan shows first results. Home completions rose 6% year-on-year in December after falling 18% the month before. It’s a closely watched move: Last year, unfinished homes prompted a wave of protests by homebuyers to boycott their mortgage payments. The reforms were helped by the lifting of Covid-19 restrictions. A few weeks before the policy change, moving to Chinese cities (e.g. to view a property) was threatened with quarantine. Preliminary data from consulting firm Beike Research Institute suggests that sales of second-hand homes in 50 major Chinese cities may have risen by more than a fifth in the first 10 days of the year compared to the same period last year.
Kaisa, a developer that defaulted in 2021, has avoided restructuring talks with investors and looks far from reaching an agreement with creditors. But despite the problems, demand for the company’s homes appears to be growing. Analysts from CreditSights, a research firm, recently visited a project in Shanghai and found that agents were no longer offering discounts. The absence of price reductions points to increasing demand for properties in good locations.
Some foreign investors have been encouraged by the state’s plan. Firms have been almost completely locked out of the offshore bond market, where many global wealth managers and hedge funds are trying to recover losses from missed payments. Funds raised by developers fell by a quarter last year compared to the previous year. But on Jan. 12, Dalian Wanda Commercial Management priced a $400 million junk bond, the first in more than a year and a sign that some well-known developer-linked groups are slowly moving offshore in the coming year. Dollar bond market could return. Fidelity and BlackRock, two American asset managers, bought into the offering, according to Reorg, a research house.
According to analysts at Bank Morgan Stanley, the effort could lead to stabilization in the housing market and a modest rebound in sales in the second quarter of the year — about what the government has in mind. But officials have to walk a fine line. Too much funding would revive old problems of oversupply at a time when China’s population is beginning to shrink. Vacancy rates reached 7% in China’s largest cities and 12% in second-tier cities last year, well above the global average, estimates JPMorgan, another bank. About 70% of homes sold since 2018 were bought by people who already own at least one.
Speculation has made Chinese homes the most expensive in the world in terms of price-to-income. Hong Hao of plant; grow Investment, an asset management firm, says the “three red lines” policy has at least obliged developers to slow the rate at which they borrow. The campaign brought major problems for the Chinese economy, but without it “the situation would be much worse,” he adds. If the government ends up pouring too much money into the bailout, it could lead to another wave of excesses and more empty coastal projects. ■
