In recent days, China’s regulators have stepped up efforts to boost financing for property developers. On November 17, regulators held a meeting with major financial institutions, instructing them to meet the “reasonable” financing needs of major developers. According to press reports, regulators told the large state-owned banks to abide by three “no less thans”:
- Banks’ lending growth to real estate should be no less than the industry average of lending to real estate
- Lending growth to private developers should be no less than that bank’s loans to state-owned firms
- Growth in mortgage loans for private developers should not be less than that bank’s overall growth in mortgage loans
Media have also reported that regulators are drawing up a new “whitelist” of 50 developers, both private and state-owned, that will be earmarked for credit, equity and debt financing.
These measures are intended to prevent, or at least slow, further financial contagion among relatively healthy developers – but do not amount to anything close to a wholesale “rescue” of the sector. One of the most alarming developments for policymakers is that credit risks have moved beyond private property developers to “mixed-ownership” firms with substantial state shareholding – even Vanke, regarded as one of the industry’s more financially disciplined players, has seen prices on its dollar bonds fall (with a partial recent recovery thanks to pledges of support by the Shenzhen government). Further contagion could impact even state-owned developers, the key ballast for the sector. That would further imperil hopes for a revival in property sales, as well as Beijing’s increasingly ambitious affordable housing plans, which rely heavily on state-owned developers.
It remains to be seen how banks will respond to these new directives and which developers will be put on the “whitelist.” We continue to believe that it is unlikely that Beijing will undertake a major bailout of the most indebted private developers, such as Evergrande and Country Garden. China’s leadership remains intent to move to a new model for real estate that centers on affordable housing. Policy efforts are thus largely intended to cushion the transition to this new model rather than revive the old model.
Forceful and effective implementation of these support measures would help address one aspect of the “doom loop” in the property sector, which is household lack of confidence in developers’ ability to deliver homes purchased in advance. But the reality is that even if such confidence improves, the national property market faces structural headwinds of housing oversupply and declining demand in many cities. The continued downward pressure from property, thus far impervious to recent stabilization measures, remains a key macro risk for 2024 (see our related comment on China’s October macro data HERE).
Caixin, China’s most authoritative financial news provider, captures the dynamic well in an article today on the new support measures:
“Regulatory policies can only smooth out market fluctuations, not control the market,” says an individual close to the Ministry of Housing and Urban-Rural Development. This person said that the real estate market has yet to see a revival, primarily because the market supply and demand relationship has undergone significant changes. Currently, it’s necessary to acknowledge the reality of market fluctuations and recognize that administrative power is relatively limited in the face of market logic.
Taiwan’s election dynamics take another turn
Over the weekend, efforts by Taiwan’s two main opposition parties to form a joint ticket for upcoming presidential and legislative elections fizzled. The collapse of the coalition means that the candidate from the ruling DPP party, Vice President William Lai, remains the favorite to win the election. That result would mean that China-Taiwan relations stay high for the next four years and remain a key flashpoint between Washington and Beijing. However, the probability of a Chinese invasion of Taiwan over this period remains low.
Only last week, the opposition Kuomintang (KMT) and Taiwan People’s Party (TPP) shook up the race with a pact to field a joint ticket for Taiwan’s presidential and legislative elections on January 13 (see our coverage HERE). On Saturday, however, the two sides failed to reach agreement on the critical issue of which party’s candidate would lead the ticket to campaign for president. Ko Wen-je, the political maverick who leads the TPP, balked at polling data that gave the nod to the KMT’s Hou Yu-ih. Ko is under heavy pressure from his voters not to accept a decision that favors the KMT.
What happens next
Barring further surprises, the DPP remains heavily favored to win the presidential election. The opposition has until Wednesday (Nov. 24), when candidates must be formally declared, to revive their deal. Both the KMT and TPP have said that they are open to a new agreement but at this point it seems unlikely. Ko implied on Sunday that he intends to run as president.
There is still intrigue related to Terry Gou, the Foxconn founder running as an independent. Gou held an extended meeting with Ko over the weekend, leading to the possibility that the two could join forces. However, Gou has a relatively small base of support, so it seems unlikely that an alliance would be enough for the TPP to win.
Lai’s announcement on Monday that Hsiao Bi-khim will be his candidate for vice president adds to the DPP’s momentum and signifies political continuity. Prior to the announcement, Hsiao had served as Taiwan’s high-profile envoy to Washington. She has been highly effective in this role, boosting support for Taiwan among both parties in the United States. She is also a protégé of current president Tsai Ing-wen. Her appointment will be reassuring to those in Washington who are less personally familiar with Lai and concerned about his potential to upset an already fragile status quo with Beijing.
Outlook for Taiwan geopolitical risks
A victory by the opposition, an outcome that looks increasingly unlikely, would significantly reduce China-Taiwan tensions. A victory by Lai, which is now the basecase, will likely mean that cross-Strait relations will stay at least as high as they have been over the last four years.
China’s leadership is currently reviewing its strategy with respect to Taiwan. Beijing’s use of sticks rather than carrots – including increasing military pressure as well as economic sanctions – since Tsai’s election in 2016 has clearly been ineffective in blunting political support for the DPP. Beijing will likely make some back-channel outreach to Lai after the election but this would start from a place of strong mutual distrust. There is some risk that Beijing could increase saber-rattling actions towards Taiwan between the election and Lai’s inauguration in May if China’s leadership perceives that Lai is preparing to take provocative actions.
The US election will of course also be a major factor in China-Taiwan dynamics. If Biden wins re-election, US-China dynamics regarding Taiwan will be tense but basically stable. During his summit with General Secretary Xi Jinping last week, Biden sought to reassure Xi that the US remains committed to its long-held One China policy and does not favor a move by Taiwan to declare independence. Xi indicated that Beijing remains intent on reunifying with Taiwan but did not signal a specific timeline or increased urgency behind this goal.
Should Trump win the US election, it would inject additional uncertainty into these dynamics. In his first term, Trump empowered officials who were very supportive of Taiwan, angering Beijing – in particular, Secretary of State Mike Pompeo – even as Trump himself cast doubt on whether defending Taiwan should be a strategic priority for the US. If repeated in Trump’s second term, this dynamic could increase the risk of a miscalculation, with Beijing perhaps seeking to test if Trump would really come to Taiwan’s defense.
Overall, we continue to see the risk of a Chinese invasion of Taiwan as a low probability over the next five years for reasons detailed in our special report on Taiwan geopolitical risks from May (see link HERE). An invasion would pose major military, economic, diplomatic, and domestic political risks for Xi. Xi could very well decide such risks are worthwhile if necessary to prevent Taiwan’s formal independence, but if the political status quo holds in Taipei and Washington than Beijing will opt for less extreme measures to maintain pressure on Taiwan.
