For decades, private developers had spearheaded China’s urbanisation process. But from late 2021 onwards, they began defaulting on the vast debts they had accumulated. Ever since, they have struggled to raise funds or have failed to relieve the pressure on themselves through sales of assets.
Beijing offered the industry a package of tentative support measures in November, which it reiterated and partly extended this week. It includes the easing of rules for property acquisitions and the extension of debts. But its efforts have so far failed to revive market activity — from purchases of land to new funding — across an industry that for years was driven by the private sector.
Long before the crisis, the Chinese government had sought to limit the property sector’s expansion to avoid overheating land prices. Its campaign culminated in the so-called “three red lines” policy introduced in 2020 that limited leverage at individual developers and ultimately curtailed their access to financing.
This led to a wave of defaults that ground construction activity to a halt and has divided the sector into designated victims of the cash crunch and those considered able to survive it. This means government measures so far have typically directed cautious levels of support towards “high quality” developers rather than those that have defaulted and remain caught up in drawn-out and opaque restructuring processes with international creditors.
One example of fresh government support is a push to authorise new share issuance, which last month saw developers China Poly and China Merchants Shekou gain approval from the China Securities Regulatory Commission to issue $1.8bn and $2.4bn in shares, respectively. While the move is a significant change in tack from Beijing after years of discouraging property industry equity issuance, analysts suggest it is unlikely to have an impact.
Construction in big Chinese cities is ongoing, but many of the high-quality developers that are able to continue have state support. Even then, the recent deterioration in activity has sparked alarm.
Ting Lu, chief China economist at Nomura, points to data from the China Real Estate Information Corporation (CRIC), which shows sales volumes at the country’s top 100 developers fell by a third in June year on year, compared with a decline of 21.2 per cent in May. Those declines come against a period last year when activity was already suppressed.
Beijing’s approach has been to prioritise completing projects, many of which are residential and politically sensitive. It has also sought to delay any further debt crunch. Economists at HSBC suggested the measures represented “a critical step in instilling market confidence”, but others are more pessimistic. Lu at Nomura noted that the 16-point measures had reversed most of the financing-tightening measures for the property sector, but argued they were “unlikely to sufficiently stimulate home purchases”.
Meanwhile, there are few signs of a recovery of appetite for bonds in domestic or international markets. In Hong Kong, once a booming market for offshore China developer bonds, one investor says the “whole market is scaling down” and that long-only investors are now underweight the sector, in stark contrast to before the crisis.
For the heavily indebted companies that originated them, both government support and their future survival is less clear cut.
