Over the weekend, China’s central bank and banking regulator jointly issued a 16-point plan to increase financial support for the property sector (the measures are not public but have widely circulated on the Internet; see Appendix below for a summary). While Chinese authorities have already loosened property policies on the demand side over the course of this year, this is by far the most significant support for the supply side – namely, boosting financing capacity for private property developers.
The notice follows the release on Friday of a 20-point plan to “optimize” China’s Covid-19 measures and reduce the impact on the economy (please see: New Covid measures have limited near-term impact but build momentum for a gradual pivot). Together, these steps indicate a new sense of urgency by China’s leadership to support growth in 2023. They imply deep concern over mounting economic risks and the loss in confidence under the current policy stance.
While Covid containment and the crackdown on property developers have been the two key drags on China’s economy this year, they are also highly political campaigns that Beijing is now modifying – changes that can only come with approval by General Secretary Xi Jinping.
On the Covid front, we are skeptical that the latest measures will have much immediate impact, as local governments will continue to focus on preventing outbreaks as their top political priority. But it is still remarkable that Beijing is willing to send a loosening message while China heads into the cold weather season facing rapid growth in new Covid cases.
With the latest property policies, Beijing is not throwing in the towel in its crackdown on financial risks, but at least partially backtracking by easing regulatory constraints on lending to developers.
The fact that these announcements so quickly follow the 20th Party Congress is also unusual timing. We had been expecting a longer period of policy stasis between the Party Congress and the annual National People’s Congress in March 2023, when officials – including incoming premier Li Qiang – formally take up their new government positions. Xi has clearly short-circuited this process to build some economic momentum for 2023, and Li appears to have already stepped directly into the policymaking process.
Assessing the latest property measures
We have previously noted that the key challenge for the property sector is the financial predicament of private developers. While Beijing has been incrementally stepping up support measures, we have been skeptical that the leadership would be willing to provide a robust bailout for developers. But the latest measures are at least a partial move in that direction: not a full rescue package, but an indication that Beijing is willing to relax its crackdown to avoid a hard landing in 2023.
The most significant of the 16 measures relate to extending financing for developers, with regulators indicating that they will:
- Instruct banks to extend developer loans maturing in the next six months for another year and to not to reclassify the status of these loans
- Temporarily relax limits on banks’ loan concentration to developers, which has been a key plank of Beijing’s “three red lines” policy
- Encourage developers to negotiate with bond holders to extend maturities and engage in debt swaps, with Beijing also supporting bond financing through various credit enhancement tools (announced separately last week but with few details)
- Boost support to complete stalled housing projects, including financing through China’s policy banks and directives for banks to extend financing to construction companies facing payment delays
- Provide financial support for real estate M&A, including through the trust sector (notable as regulators have sought to limit trust financing for property)
It is also notable that the new guidelines start by instructing banks not to differentiate between private and state-owned developers. While this may have limited direct effect given that banks and households will still perceive state-owned developers to carry an implicit government guarantee and be a safer bet, it nonetheless indicates Beijing’s intent to support private developers and push back on perceptions that China’s leadership is encouraging the shift to a state-dominated sector.
There are also measures on the demand side, including greater flexibility for local governments to set down payment ratios and mortgage rates, and instructions for banks to renegotiate mortgages with households in financial distress or with undelivered properties.
What is the net impact of these measures? At the very least, Beijing’s shift in property support over the last week removes the tail risk of a major further deterioration of developer finances in coming quarters and associated systemic risks for the financial system. Private developers will have more breathing room to make payments as a wall of maturing debt comes due. The healthiest private and state developers will likely be able to resume land sales and new housing projects in H1 2023.
Still, many developers will continue to labor under high debt levels and struggle to regain confidence from home buyers and creditors. Further support from Beijing will likely be necessary in 2023 to keep these risks manageable. All in all, these dynamics imply a basecase of a gradual recovery of the sector in coming quarters, with real estate investment making a modest positive contribution to GDP growth in H2 2023 (relative to a very depressed baseline from this year).
The medium-term outlook for housing investment remains subdued. Speculative demand for housing will be lower in light of Beijing’s crackdown and changed perception of risks. Organic demand will be lower due to demographic headwinds (falling population growth and slowing urbanization). Supply will be constrained by continued limits on developer debt and Beijing’s efforts to promote new and more stable financing models such as growth of a rental market.
Outlook and watchpoints for growth in 2023
Together, the latest measures and Beijing sense of urgency now point to a more optimistic outlook for 2023, mainly in H2. Q4 2022 and Q1 2023 will remain very challenging, especially on the Covid front. Next year’s economic climate will improve in the second half relative to this year but growth is likely to be restrained relative to pre-pandemic levels given headwinds for property, the very delicate process of shifting away from zero-Covid, and limited support from exports given slowing global growth.
The next key watchpoints will come with the approach of the annual Central Economic Work Conference, held by mid-December, which will outline macro policies and economic priorities for 2023. It will be important to see whether Beijing’s desire to boost growth and confidence extends to other policy areas, such as lessening regulatory pressure on big tech.
The biggest uncertainties revolve around the shifting narrative on Covid. Beijing’s messaging is confusing, aiming to lift confidence while denying that China is relaxing the fight against Covid. Local officials are left to reconcile mutually opposed goals of limiting outbreaks and fine-tuning Covid restrictions; they are likely to favor the former given Xi’s political emphasis on protecting the population. China’s vaccination campaign and public health system appear nowhere near ready to make a pivot. All of which is to say that we continue to think that it will not be until mid-2023 that Chinese authorities can substantially relax containment measures, and even then only cautiously.
APPENDIX: Summary by Bloomberg News of latest property sector measures
- Property development loans for developers
- Financial institutions should treat property developers under state or private ownership equally.
- Lenders should specifically support developers that have focused on real estate businesses and have sound corporate governance.
- Home-buying requirements for individuals
- Support local governments to “reasonably” set down-payment thresholds and mortgage rate floors in a city-specific approach to accommodate basic and improving housing demand.
- Optimize purchasing rules on first homes by new city dwellers.
- Construction companies
- Ensure “continuous and stable” fundraising by construction companies.
- Extension on developer borrowings
- Developers’ outstanding bank loans and trust borrowings due within the next six months can be extended for a year.
- Bonds
- Bond issuance by quality developers will be supported.
- Repayment on developers’ bonds can also be extended or swapped through negotiations.
- Trust financing
- Trust companies are encouraged to provide developers funding support over mergers and acquisitions, rental properties and retirement homes.
- Special loans for project completion
- Policy banks China Development Bank and National Bank for Agriculture and Rural Development should offer special loans “in an efficient and orderly manner” to ensure property projects are delivered.
- Additional support to ensure residential project completion
- Major lenders of residential projects that are facing construction delays should offer additional financial support.
- Property project acquisition
- Banks and asset management companies are encouraged to support acquisitions of property projects by stronger developers from weaker rivals.
- Banks and asset management companies can issue bonds dedicated to real estate project acquisitions.
- Market-based approaches including bankruptcy and restructuring
- Asset management companies are encouraged to deal with residential projects as bankruptcy administrators and investors on restructuring.
- Homebuyers’ mortgages
- Encourage banks to negotiate with homebuyers on extending mortgage repayments if their property purchasing contracts have been changed or canceled, or if they are under Covid-induced unemployment.
- Mortgage repayment
- Buyers’ credit scores will be protected. Credit scores have been the center issue of a widespread mortgage boycott since July, as impaired creditworthiness would make it harder for people to buy real estate in the future.
- Easing a major restriction on banks’ property lending
- A restriction on bank lending to developers can be “temporarily” eased. China began imposing caps on bank’s property lending in 2021, capping loans to developers and mortgage lending.
- Banks which have breached the cap will be given extra time to meet the requirement.
- Fundraising for acquisitions
- Financing rules related to property project acquisitions will be temporarily optimized, and banks and national asset management companies should utilize the new beneficial policies on real estate financing.
- Lending on rental properties
- Financial institutions should ramp up support for companies that own rental property business, and actively accommodate their long-term funding.
- Diversify fundraising for rental properties
- Banks can issue bonds dedicated to building rental properties. A trial on real estate investment trusts, or REIT, should be pushed forward.
