Why Beijing won’t bail out its real estate sector

Why Beijing won’t bail out its real estate sector

Many Chinese developers have halted or delayed construction on presold homes due to cash flow problems. Pictured here is a property construction site in Jiangsu province, China, on Oct. 17, 2022.

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BEIJING — China’s central government is not likely to spend billions to save the struggling real estate sector, even if foreign investors are hoping for a massive bailout, analysts said.

A year after Chinese developer Evergrande‘s debt problems began rattling investors, the country’s real estate troubles have only gotten worse. Some homebuyers refused to pay their mortgages due to construction delays, while property sales plunged. Once-healthy developers are also struggling to repay debt.

“I doubt there will be direct bailouts of property developers by the government, even though they may continue to ask banks and [state-owned enterprises] to help selected troubled developers,” said Tommy Wu, senior China economist at Commerzbank.

He expects Beijing will want to gradually resolve the problems in real estate and reduce the industry’s role in the economy. Property and sectors related to it account for about a quarter of China’s gross domestic product.

“New rounds of measures in the coming weeks and months will still most likely continue to focus on supporting home completion and stimulating housing sales,” Wu said.

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S&P Global Ratings said in September it estimates the property market needs between 700 billion yuan ($98.59 billion) to 800 billion yuan “to ensure distressed developers can finish presold homes.”

A central government fund of a similar size has yet to be announced.

That’s despite multiple reports, citing sources, of proposed funds. Some investment analysts expect such a fund, especially one significantly large enough to boost confidence.

Many developers are already struggling financially.

Total liabilities disclosed by Evergrande, Kaisa and Shimao was more than 2.6 trillion yuan as of mid-2021, after which the three developers’ financial problems worsened. They make up just a fraction of the industry.

At that scale, even if the central government spent hundreds of billions of yuan it would have little effect, said Qin Gang, executive director of China real estate research institute ICR.

We do not expect bail outs of the troubled developers, while the ‘market-oriented’ approach of supporting high-quality developers could continue…

That’s not considering that the government is now far more strapped for cash compared to three years ago, he said, pointing to falling revenue from land sales and taxes, and increased spending on Covid measures.

China’s central government collected about 9.15 trillion yuan ($1.26 trillion) in total public revenue in 2021, according to the Ministry of Finance.

That revenue for the first eight months of the year was 6.36 trillion yuan, down by nearly 10% from a year ago without accounting for tax credits.

Social perception

China could see more state-led developers in real estate sector, says economist

A record-long slump

Government stance

In an example of how state entities are expected to become increasingly involved, Evergrande’s Shenzhen unit announced in late September it would cooperate with a state-owned enterprise to ensure home delivery.

The central government has otherwise kept its focus on issues outside of real estate.

Many initially expected Beijing’s revival of a central bank lending tool this fall to help developers finish home construction — but it turned out to be for infrastructure, Caixin reported this month, citing sources familiar with the matter.

The People’s Bank of China did not respond to a CNBC request for comment.

“While more forceful support will help [real estate], currently the biggest challenge to restore confidence is still the weak economy and the drags on consumer and business activity due to the zero-Covid policy,” Commerzbank’s Wu said.

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