China Goes All Out to Rescue Its Ailing Property Sector

China is pushing hard to prop up its embattled property market to help reignite growth in the world’s second-largest economy that has been crippled by years of Covid restrictions.

(Bloomberg) — China is pushing hard to prop up its embattled property market to help reignite growth in the world’s second-largest economy that has been crippled by years of Covid restrictions.

The start of the year has opened with a barrage of measures, including a plan to ease restrictions on borrowing by developers and addressing the risk of “capital chain breaks” in the sector. Authorities are also looking at extending lower mortgage rates to fuel home purchases and capping commissions for real estate agents.

The moves follow up on a sweeping rescue plan in November, which has shown little immediate effect as the nation struggles with a wave of infections after abruptly abandoning its Covid Zero approach. A slump in new home sales deepened to 31% last month, underscoring the challenges in reversing the downturn.  

“The recent measures will definitely alleviate developers’ debt pressure and improve their liquidity,” said Shen Meng, a director at Beijing-based investment bank Chanson & Co. “However, they may have little or very limited positive effect on the sector. The core problem is households’ quite weak interest to buy new homes.”

Here’s a list of recent support measures for the sector that China announced or is said to be contemplating:

1. Easing the “three red lines” policy

China is planning to relax restrictions on developer borrowing, dialing back its stringent “three red lines” policy that exacerbated one of the biggest real estate meltdowns in the country’s history.

Beijing may allow some property firms to add more leverage by easing borrowing caps, and push back the grace period for meeting debt targets set by the policy, according to people familiar with the matter. The deadline could be extended by at least six months from the original June 30 date, the people said.

2. Addressing ‘capital chain’ risks

In a recent interview with the official Xinhua News Agency, China’s housing minister, Ni Hong, pledged further efforts to boost confidence in the property market, ward off risks, and steer the industry onto a “high-quality development path” in 2023. The minister also vowed to lower down payment ratios and mortgage rates for first-home buyers.

3. Capping property agent commissions

Authorities are considering a nationwide cap on property commissions, likely a range of 2% to 2.5% of the sale price as a guide, people familiar with the matter said. The cap, once in place, is likely to be adjusted every one to three years based on market conditions, the people said.

4. Extending favorable mortgage rates

China is allowing cities to extend measures introduced in September that allow lower mortgage rates for first-home buyers if newly constructed house prices drop for three consecutive months. 

Cities are eligible to maintain, lower or remove minimum interest rates on loans for first home purchases, according to a statement from the central bank and banking regulator Thursday evening. 

5. Reviving residential real estate funds

Beijing resumed green-lighting private equity funds to raise money for residential property developments, after first halting such approvals in 2021, people familiar with the matter said. 

6. Strengthening ‘too-big-to-fail’ developers 

The Financial Stability and Development Committee told banking and securities regulators to help shore up the balance sheets of some “systemically important” developers, people familiar with the matter said. 

The aid could range from providing equity financing and loans, to allowing the creation of real estate investment trusts and spurring acquisitions.

7. Improving conditions of quality developers

The central bank vowed in late December to improve debt condition of quality, leading property developers and satisfy the industry’s reasonable financing need. It’ll push for mergers and acquisitions as well as restructuring in the sector. 

Investors

The efforts have rekindled interest among investors for the beaten down sector. A Bloomberg Intelligence index of Chinese property companies has risen 72% from a low in October. 

Property has become “a key concern” for global investors, said Winnie Wu, chief China equity strategist at Bank of America Corp., in a Jan. 6 note. While recent measures offer downside protection, “revival of developers will still depend on the recovery in home sales and their cash-generating capabilities, which will hopefully come with the economic reopening and recovery.”

–With assistance from Lisa Du.

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