China recovering from Real Estate Crisis

The Chinese government is undertaking its most significant effort to date to resolve a crisis that has severely harmed the nation’s enormous real estate market and its economy over the past year.

Shares of Country Garden, the largest real estate developer in China, increased by as much as 52% in Hong Kong after Beijing presented a 16-point plan on Friday that considerably loosens restrictions on lending to the industry.

Key initiatives include enabling banks to extend maturing loans to developers, promoting real estate sales by lowering mortgage rates and down payments, encouraging new funding avenues like bond issuance, and guaranteeing that pre-sold homes are delivered to customers.

According to Larry Hu, chief China economist for Macquarie Group, “basically, officials ordered banks to try their best in helping the property sector.”

The set of measures was called a “turning point” for the Chinese real estate market by Tao Wang, chief China economist at UBS. She calculated that it might add more than 1 trillion yuan ($142 billion) to previous programs announced earlier this year.

On Monday, Chinese developers listed in Hong Kong increased by an average of 11%, driving the market higher. Shares of Dexin China, a developer with a base in Hangzhou, soared by 151%, while Longfor Properties, another prominent developer, increased 17%.

Many observers believe that the rescue package is the greatest indication yet from Chinese officials that the two-year crackdown on the sector is now finished. The government started attempting to control developers’ excessive borrowing in August 2020 in an effort to slow the rise in housing prices.

Evergrande, the second-largest developer in the country, went into default on its loan last year, which caused the issues to worsen. Several significant businesses sought protection from their creditors as the real estate sector imploded. The lack of money forced numerous pre-sold housing developments across the nation to postpone or stop construction.

This summer, when furious homebuyers refused to make mortgage payments on unfinished homes, the crisis entered a new stage, shaking the financial system and raising concerns about possible contagion. Since then, authorities have worked to diffuse the situation by pleading with banks to give developers larger loan guarantees so they can finish their projects. Interest rates have also been lowered by regulators in an effort to boost consumer confidence.

The sluggish economy and rigorous Covid regulations kept buyers away from the market, however, and the real estate recession remained. A private poll conducted by China Index Academy, a leading real estate research agency, found that sales by the 100 largest real estate developers decreased 26.5% in October compared to the same month last year. Their sales for the year thus far have decreased by 43%.

The property problems have hurt China’s economy along with a stringent zero-Covid policy that has reduced consumer and manufacturing expenditure. China’s GDP increased by 3.9% in the third quarter compared to the same period a year earlier, bringing the first nine months’ growth to barely 3%, much below the official target of 5.5% set in March.

Analysts welcomed Friday’s actions but remained wary of how they would affect consumer confidence.

Nomura analysts stated in a research paper on Monday that the real estate market “has yet to show indications of recovery,” adding that the most recent actions might have “little direct influence” on encouraging home sales.

Despite recent adjustments, they continued, “Beijing’s zero-Covid strategy will continue to have an impact on the real estate market.”