What's going on in the Chinese real estate market? (Part 2)
Updated: Jan 4
China l Real Estate | Economy | Inflation
The following article provides a brief overview of the current state of the Chinese economy, particularly the real estate sector. The Chinese real estate sector has attracted so much attention for two reasons. Firstly, the sheer size of the asset class
and secondly, the high relevance for the Chinese GDP.
The Chinese economy shrank by a seasonally adjusted 2.6% on quarter in the three months to June 2022, compared with market estimates of 1.5% drop and after an upwardly revised 1.4% growth in the previous quarter.
The three main reasons for the negative development, according to the IMF, are the new emergence of COVID-19 cases, the adherence to the zero-COVID strategy and the development in the Chinese real estate market.
The sharpest decline since the first quarter of 2020, at the onset of the pandemic. Since then, more contagious variants have driven a worrisome surge in COVID-19 cases. The worsening crisis in China’s property sector is also dragging down sales and real estate investment. -IMF
Surprisingly high youth unemployment (reaching 19.9%, the highest ever).
Real Estate Sector
Average new home prices in China's 70 major cities dropped by 0.9 percent year-on-year in July 2022, following a 0.5 percent decline a month earlier. It was the third straight month of decrease in new home prices, and the steepest fall since September 2015.
Oversupply is forming
Significantly less land sales and new residential constructions
Real Estate Developers
Property developers had historically depended on rising home prices and surging sales to justify massive leverage and overbuilding. But once the bubble began to deflate last year, these over-leveraged property developers ran into serious liquidity and credit constraints that made it impossible for them to complete their construction projects -Michael Pettis, Finance Professor at Peking University
Sell-off of Chinese developer dollar bonds
Main government measures
The People’s Bank of China cut its five-year loan prime rate by 15 basis points to 4.30% from 4.45%, and lowered its one-year loan prime rate by 5 basis points to 3.65%.
China will offer 200 billion yuan ($29.3 billion) in special loans to ensure stalled housing projects are delivered to buyer
The baseline foresees a recovery from the lockdowns in the second half of 2022, with overall GDP growth at 3.3 percent in 2022 and 4.6 percent in 2023. Upside risks to growth include announcements of material fiscal support and a recalibration of the authorities’ zero-COVID strategy to reduce growth trade-offs, building on their successful campaign to ramp up the rollout of booster shots. -IMF
Downside risks include larger-scale outbreaks of more contagious virus variants that trigger further widespread lockdowns under the zero-COVID strategy. In addition, delayed price and balance sheet adjustments in the property sector could cause a sudden, wider crisis or a protracted adjustment with broader macro-financial spillovers. A sustained slowdown in China would have strong global spillovers, whose nature will depend on the balance of both supply and demand factors. For example, further tightening of supply bottlenecks could cause higher consumer goods prices worldwide, but lower demand might ease commodity pressures and intermediate goods inflation. -IMF
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Part 1 (from May)
Sales of developers have plummeted. Of 31 listed Chinese developers 26 cited falls of at least 50% in April (YoY).
China state-backed builder Greenland asked for a delay in repayment by a year, "a rare sign of stress at a state-linked firm".
Overall Credit Market
Significant impact on the overall China credit market. The dollar-bond default rate hit a record-breaking 4.5%.
Goldman Sachs Outlook
“Given the pick up in stresses, we raise our FY22 China Property HY default rate forecast to 31.6% (from 19.0% previously), which was our previous bear case assumption”
Rhodium Group Outlook
“The key problem remains the overall decline in sales and prices, which is creating an annualized shortfall in developers’ revenue of around 3%-4% of GDP compared with last year. Interest rate cuts may help at the margin, but only after the threat of lockdowns is lifted, and probably only in major cities as well.” -Logan H. Wright, partner and general director, China Markets Research, Rhodium Group
FED Financial Stability Board
“Credit to Chinese businesses has increased even faster, supporting GDP growth, but the resulting leverage in the corporate sector makes it increasingly vulnerable to shocks. Nonfinancial business credit in China has reached about 160 percent of GDP"
“Corporate indebtedness has become particularly high in China’s real estate sector—which has been a key engine of China’s rapid growth. In the past few years, the Chinese government has tightened regulation of property markets, including the imposition of new constraints on home purchases, banks’ ... mortgage lending in some markets. Not long after these initiatives were implemented, property sales slowed”
“Chinese property developers in the offshore dollar market are trading at increasingly distressed levels. Although the Chinese government has managed to contain its effects so far, a significant worsening of the downturn in property markets could affect China’s fin. system”
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