Chinese Government blinks, eyes property bailout

A flurry of excitement Thursday afternoon as the government of President Xi Jinping finally broke and let slip plans for a $US144 billion bailout (yuan 1 trillion) of the country’s debt ridden, stricken property sector.

Banks will also be helped by the plan which will see them get money from the central bank to help in the bailout.

But not all stricken developers will be helped. It seems only those subject to the politically embarrassing mortgage boycott will be involved in the plan.

Details of the plan were leaked to the Financial Times Thursday afternoon and will see banks use their own money, along with funds provided by the country’s central bank, the People’s Bank of China.

The bailout will be aimed at financing builders to complete unfinished projects where thousands of people are not withholding mortgage payments in a mass protest that has grown in the past three weeks or so.

The People’s Bank of China will initially issue about yuan 200bn (around $US25 billion) of low-interest loans, charging about 1.75% a year, to state commercial banks, according to the Financial Times report.

Under the plan, recently approved by China’s State Council, the banks will use the PBoC loans along with their own funds, lent at market rates, to refinance stalled real estate projects.

The hope is the banks will be able to leverage its initial fund by up to five times to raise a total of about $US144 billion and partially fill the funding gap needed to complete unfinished projects, the FT said.

But the Financial Times says bank executives and analysts have warned that the central bank may struggle to raise its targeted amount given the difficulties banks will face in making a return on distressed real estate projects.

Seeing the country’s major banks are all state-controlled, with Communist party groups inside executive teams, getting the loans fixed up shouldn’t be a worry. Making money on the aid will be another problem.

Over-leveraged developers such as China Evergrande, the biggest and most indebted company in the sector, have had to suspend the construction of millions of apartments across China over the past year, raising concerns of financial and social turmoil if increasing numbers of home buyers withhold mortgage payments or take to the streets.

Multiple developers in China have defaulted on domestic and foreign debts in the past year or so after Beijing implemented tighter credit controls, undermining one of the most important engines of the country’s economy and leaving millions of home buyers in limbo.

These tighter controls were made at the direction of President Xi under his policy idea that’ housing was for living, not investment’

The protestors in Henan have reportedly been bullied by local and provincial officials and the central bank has sent in one of its most senior executives to lead the resolution of the problem and get money repaid to the depositors.

The two protests are the latest problems for Xi and his government to try and control (along with the nagging Covid infections and new style lockdowns) ahead of the Party Congress in November at which he wants to be elected to a third term.

On top of this, China Evergrande, the most indebted of China’s many indebted property developers put its Hong Kong office tower and HQ on the market Thursday. Evergrande’s founder and CEO and other executives exited this week after being found to be a part of as plan that siphoned $US2 billion from an Evergrande subsidiary in an attempt to raise funds to keep the group afloat.

Reuters reported earlier this week that a fund with a potential capital base of $US44 billion (300 billion yuan) had been set up between China Construction Bank (50 billion yuan) and a 30 billion yuan re-lending facility from the PBoC.

This fund seems to have been the first of the funds that the FT is reporting about on Thursday.

Reuters said a Chinese data group, REDD has first reported the fund and had also said the fund could be used to buy financial products issued by the developers or finance state buyers’ acquisitions of their projects.

Chinese property is in deep trouble. The June investment data from the National Bureau of Statistics (NBS) showed a 5.4% drop in property investment over the first six months of 2022 from the first half of 2021. That was deeper than the 4% fall in the five months to May.

Property sales by floor area slumped 22.2% year-on-year in January-June, compared with a 23.6% fall in January-May, according to data from the NBS.

New construction starts measured by floor area fell 34.4% in the first six months from a year earlier, after a 30.6% plunge in the first five months of the year.

Funds raised by China’s property developers declined 25.3% year-on-year in January-June, after a 25.8% drop in January-May.

Western analysts reckon there are tens of millions of people with mortgages on unfinished apartments and houses – especially in second and third tier cities and towns.

S&P Global produced new estimates this week showing China’s property sales are set to plunge this year by more than they did during the 2008 financial crisis.

According to new estimates national property sales across China could drop by about 30% this year — nearly two times worse than their prior forecast. S&P blamed the growing mortgage boycott for the sharper fall in sales this year.