It seemed unlikely that the gloomy situation in the Chinese real estate sector would get worse, but it is happening. Some suffocated and indebted real estate developers have been hit with another problem: disgruntled mortgagees who have risen up in rebellion throughout the country, refusing to pay their installments until these companies resume construction of their properties, halted precisely because of their financial difficulties. .
Seeking that the thing does not lead to the collapse of a sector close to implosion, the Chinese central bank (the People’s Bank of China , PBoC for its acronym in English), intends to mobilize up to one trillion yuan (more than 145,000 million euros ) in loans for those paralyzed promotions and, incidentally, reactivate the sector.
To stop the ‘bleeding’, which has largely contributed to reducing the country’s year-on-year growth to just 0.4% in the second quarter , the central bank will initially grant some 200 billion yuan in loans to state-owned commercial banks. at low interest, with a rate of around 1.75% per year, people involved in the negotiations tell the Financial Times . The plan, recently approved by China’s State Council, calls for banks to use these loans – at market interest rates – along with their own funds, to refinance stalled real estate projects.
Beijing hopes that the banks will be able to multiply their initial contribution by five to reach the mentioned trillion yuan and partially cover the financing gap necessary to complete the unfinished projects. However, bank executives and analysts have warned that there could be difficulties in raising the amount planned by the PBoC, given the difficulties banks will face in making the stalled projects profitable. “What worries us is that the scale of these supports is not large enough to save the situation, [which] is now turning in [a] worse direction,” Esther Liu, director of S&P Global Ratings, tells CNBC.
“Many unfinished residential projects have already been sold or are located in underdeveloped cities where the purchase and rental of housing are weak. This limits the number of developments in which the rescue fund can invest without suffering losses,” Dan explains to the FT . Wang, chief economist at Hang Seng Bank. Home transactions in smaller “third-tier” cities, where most of the unfinished developments are located, fell by more than a third this month from a year ago, even after local authorities launched numerous support measures to boost buyer demand, ranging from interest rate cuts to purchase subsidies.
300 promotions with defaults
According to estimates by the Beijing-based Everbright Bank, Chinese developers have suspended the construction of up to eight million homes , the completion of which will require two trillion yuan. The delays have prompted impatient and angry homebuyers in more than 300 half-built developments – up from 200 two weeks ago – in more than 90 cities to announce on social media that they will suspend their mortgage payments until resume construction. After a group of buyers in central China threatened last month to withhold payments if construction on their homes didn’t resume, similar boycotts have begun to spread. The value of the mortgages involved can reach 297,000 million dollars .
More than 70% of Chinese homes are sold before construction is complete; homeowners with mortgages start paying long before they get the keys. This generates an important source of cash flow for developers. These companies have struggled to obtain financing in the past two years as Beijing has cracked down on its heavy reliance on debt for growth.
Government advisers said the scale and pace of the reaction caught Beijing’s financial regulators off guard, which initially delegated responsibility for resolving the funding impasse to developers and local governments. “The delay in construction is not new. What is unexpected is the unbridled extension of the problem,” they acknowledge from Beijing. Social unrest is even contemplated if homebuyers don’t get the apartments they paid for.
The Chinese real estate sector has been intertwined with local governments and land use policy , making problems in the industry difficult to resolve quickly. In an analysis released Tuesday, Xu Gao, director of the China Chief Economists Forum, noted that the number of residential flats completed annually has not grown on average since 2005, while the amount of land area sold has decreased on average during that time.
The contraction contrasts with the rapid growth both in land area sold and in residences completed before 2005, when a new land auction process came into effect. The new bidding process restricted the supply of land and real estate, driving up house prices more than speculation, Xu said.
2.5% of mortgage loans
Some analysts have downplayed the short-term financial risk of boycotts. DBS Group claims that the Chinese banking system can absorb $1.1 trillion in losses before falling into crisis. In a note on Tuesday, S&P estimated that the mortgage default could affect 974 billion yuan of such loans, 2.5% of Chinese home loans , or 0.5% of total loans. loans.
However, these boycotts are just one symptom of a larger problem . “Tighter enforcement of rules aimed at curbing leverage has put pressure on developers like Evergrande, several of which have defaulted since last year. Uncertainty over their prospects has combined with uncertainty over the pandemic to discourage buyers. , causing sales to decline. The slump has taken a heavy toll not only on developers’ cash flows, but on the Chinese economy as a whole,” Bloomberg notes in a recent op-ed. “It is hard to see how the government can stem the decline while maintaining its strict ‘Covid Zero’ policy,” the editors add.
“The loss of confidence of Chinese home buyers in property developers is very worrying. Home sales, one of the main sources of financing for developers, look set to remain weak. Although monetary easing and government pardons debt have helped contain domestic financial risks, they are not a long-term solution to the problem Defaults by high-profile real estate developers like Evergrande remain the biggest risk to China’s real estate and financial sectors,” agrees Tommy Wu , from OxfordEconomics.