China’s collapsing housing sector is like a slow-moving train wreck – passengers, drivers, the guard and other officials all know what the situation is but no one is game to pull on the emergency cord to try and halt the disaster now well underway.
While China’s economy is being battered by the impact of Covid control lockdowns (because of the silly total elimination policy of President Xi Jinping), as we saw this week with falling retail sales in April, weakening output and investment, as well as rising unemployment, especially among young people (18- to 24-year-olds especially), the continuing collapse in the huge property sector is the crisis that is undermining the entire economy.
It has been going on longer than any other current crisis in China and has been caused by government policy – partly right to end useless and unwarranted investment and speculation, but also to punish speculators and wealthy property entrepreneurs – much in the way private internet and tech entrepreneurs have been punished and attacked in the past two years.
But perhaps it is too late to avoid a disaster in Chinese property, as the April investment, prices and the financing data for April reveals.
This week’s 0.2% trim in mortgage rates by the country’s central bank for first time home buyers was illusory with little demand, few sales and great difficulty in inspecting properties at the moment because of the widespread Covid lockdowns.
The National Bureau of Statistics (NBS) data showed a 44% drop in construction starts in April compared to a year ago – that drove a 2.7% fall in total property investment in the January-April period, from the 0.7% rise in the three months to March.
In the first four months of this year, property sales sank 29.5% to 3.78 trillion yuan ($US556.42 billion) from a year earlier, the NBS said, compared with a 68.2% gain in the same period last year and a 22.7% over the first three months.
The bureau said this was mostly due to a 32.2% slide in the residential market in the four months to April, compared to a slide of 25.6% for the first three months.
House prices grew 0.7% in April, half the 1.5% rise in March and a fraction of a 5% rise a year earlier.
The 0.7% rise in average new home prices in China’s 70 major cities in April 2, was the weakest rise in new home prices since October 2015, when Beijing’s last deleveraging campaign triggered a liquidity crisis in some major property developers.
On a monthly basis, new home prices dropped 0.2% in April, the first drop since last December, after a flat reading in the prior two months.
Property sales by floor area fell 20.9% year-on-year in the first four months, after a 13.8% drop in the first three months, according to data from the National Bureau of Statistics.
New construction starts measured by floor area fell 26.3% in January-April from a year earlier, after the 17.5% drop in the March quarter.
Funds raised by China’s property developers slumped 23.6% year-on-year in the first four months, after a 19.6% drop in the March quarter.
More and more private developers are defaulting or trying to delay interest and debt repayments, and revenue is sliding – without any attempt to soften the blow.
Reuters reported that the combined revenue of 13 major real estate companies in China plunged 52% year over year in April to 203 billion yuan ($US29.85 billion) despite the easing of property curbs to spur real estate purchases.
Of those 13 firms, only three reported a less than 40% drop, while eight saw their sales more than halve versus a year earlier, according to the report.
All this is impacting China’s economic growth, according to two forecasts out this week.
Both Citigroup and Goldman Sachs have cut their 2022 GDP growth forecasts, because of the continuing Covid lockdowns and their impact on demand, consumer spending housing and investment.
Monday, Citi — which had one of the highest China GDP forecasts — cut its outlook for 2022 growth to 4.2% from 5.1% – the government forecast is 5.5% and GDP grew 4.8% 9annual in the March quarter).
On Wednesday, Goldman Sachs analysts cut their China GDP forecast to 4% from 4.5% after weak data in April released this week.
Among April’s weak data, the Goldman analysts pointed to a plunge in housing starts and sales, half the credit growth that markets expected and a drop in consumer inflation excluding energy and food.
“The weak data highlight the tension between China’s growth target and zero-Covid policy which is at the core of China’s growth outlook,” the Goldman analysts said.
Last week, JPMorgan had reduced its estimate to 4.3% from 4.6%. Morgan Stanley cut its target in late April to 4.2% from 4.6%.
These fears have seen foreigners sell billions of dollars of Chinese renminbi -denominated bonds
International investors dumped a record $35bn worth of renminbi-denominated bonds in the first four months of 2022 as Covid-19 lockdowns hit the country’s currency and rising US yields reduced appetite for Chinese debt.
Foreign investors sold more than Rmb108bn ($16bn) worth of Chinese debt in April, taking net outflows from the country’s renminbi-denominated bond market to a record Rmb235bn for the year to date, according to Financial Times calculations based on data from Hong Kong’s Bond Connect investment programme. That marked the third straight month of net sales.
Soaring interest rates in developed markets, particularly the US, have eroded some of the advantages of holding typically high-yielding Chinese bonds.
At the same time, a weakening renminbi, which has fallen almost 5% against the dollar this year as the harsh lockdown of Shanghai stokes concerns about China’s economic outlook, has reduced the value of interest and principal payments for foreign holders of Chinese debt. So they are selling.
And, well, what do you know?
Out of the blue on Friday afternoon, China cut its key benchmark reference rate for mortgages for the second time this year to try and help the weakening economy.
It was also the second cut in mortgage lending rates this week – the earlier one was a trim of 0.2% for first time home buyers.
Friday’s cut applies to all other mortgages and was an unexpectedly wide margin for China, which usually prefers incrementalism.
The bigger cut immediately boosted shares in Hong Kong and Shanghai on Friday afternoon.
China lowered the five-year loan prime rate (LPR) by 15 basis points to 4.45%, the biggest reduction since China revamped the mechanism in 2019. The one-year LPR was unchanged at 3.70%.
The cut of 0.15% was the largest since the pandemic started in 2020 and is a real attempt to try and help steady the sliding economy – as the weak retail sales, investment, rising unemployment and falling industrial output data this week confirmed.
The LPR is a lending reference rate set monthly by 18 banks and announced by the People’s Bank of China. Banks use the five-year LPR to price mortgages, while most other loans are based on the one-year rate.
Both rates were lowered in January to boost the economy – the five-year rate was cut by 5 points, the one-year rate by 10 points (0.10%). The central bank also cut the reserve asset ratios of major banks earlier this year, after a cut in late 2021 – to no avail.
While there was market commentary that Friday’s move was a response to Premier Li Keqiang’s recent call to decisively step up policy adjustments and strive to let the economy return to the normal track quickly, it is probably more due to the very weak April real estate data and weakening prices.
The problems in housing are now intractable without more significant policy changes from the government
But Covid lockdowns continue to be the most immediate factor and, in a setback, Shanghai Friday reported more cases outside closed areas of the city for the first time in five days.
Shanghai authorities said on Friday they had found three new cases outside quarantined areas in one district on May 19. Infections also rose inside strictly controlled areas.
The new cases didn’t see any move from the government to change the June 1 deadline to lift the citywide lockdowns.