China Comes Under Growing Pressure to Fix the Country’s Housing Market
Economists and investors urge Beijing to take forceful steps as founder of developer Evergrande faces assets-transfer probe
Pressure is building on Beijing to intervene more forcefully to restore confidence in its reeling property market.
In the latest sign of stress for the market, people with knowledge of Beijing’s decision-making said authorities are investigating whether Hui Ka Yan, the billionaire founder of heavily indebted property developer China Evergrande Group, attempted to transfer assets offshore while the company was struggling to complete unfinished projects.
The company had disclosed an investigation into its founder last week, but offered little explanation. It didn’t respond to questions over the weekend.
Evergrande, whose plans to restructure billions of dollars of debts have collapsed, is one of many property developers struggling to regain their footing three years after the popping of China’s housing bubble. As bad news in the sector piles up, economists and investors are increasingly calling for more coordinated measures to restore confidence and help developers clear up their debts.
Ultimately, many say, it could require significant government intervention, much as the U.S. was forced to step in during the property-induced financial crisis in 2008.
“The government should take more decisive steps to clean up the troubled property sector, allowing losses to be allocated among developers, banks and other stakeholders,” said George Magnus, former chief economist of UBS and an associate at Oxford University’s China center.
The deepening gloom over the property market, which in recent years made up as much as a quarter of China’s economy, is threatening to offset recent improvements in manufacturing and other sectors, jeopardizing a hoped-for economic recovery.
Longer term, many economists warn, a prolonged property downturn could contribute to an extended period of stagnation in China’s economy. That could spill over into the global economy in the form of weaker demand for commodities and depressed Chinese spending on items such as fashion from the U.S. and Europe.
Property investment in the year through August fell 8.8% versus the same period last year. Home sales by value by China’s top 100 developers declined 29% in September compared with a year earlier. Other developers in trouble include Country Garden, which once was considered among China’s healthiest.
“Property is a mess,” said Leland Miller, chief executive of the China Beige Book, an economic-research firm. “That’s why we’re seeing the dullest cyclical recovery in China ever.”
The State Council Information Office, which handles media inquiries for China’s leadership, didn’t immediately respond to questions. In the past, Chinese officials have said that Western politicians and media have exaggerated the country’s economic challenges, and that they are working to bring stability to the property industry.
To date, Chinese officials have mainly tried to muddle through the downturn. President Xi Jinping’s government has focused on modest steps to keep the market from falling apart, while holding off on addressing many of the worst problems.
Ad hoc efforts to make developers clean up their debts and finish stalled projects have met with only limited success. Other measures, such as price floors imposed in many cities to help keep home values stable, have masked the depths of the distress.
China’s real-estate troubles escalated to their current level in part because of decisions made earlier, when the leadership repeatedly leaned on housing to goose growth.
‘Grab the window’
Decades ago, most Chinese people lived in homes provided by their Communist Party work units. Authorities started liberalizing the market in the 1990s, setting off one of the biggest investment booms in history.
By the time Xi came to power in late 2012, a property bubble had already formed in many Chinese cities. Xi and his advisers at times tried to curb speculative activities.
But whenever growth appeared threatened, his leadership took steps to keep the property market humming. In Beijing policy-making circles, property became known as a countercyclical tool for economic management.
In 2015, with a housing glut dragging down prices, Beijing rolled out new policies to stimulate speculative buying and launched a slum-redevelopment program that expanded demand for private housing.
When the Covid-19 pandemic struck in 2020, authorities initially stood aside as the market took off again, inflating the bubble even more.
By mid-2020, Xi was worried the boom was drawing credit away from economic sectors he considers crucial to China’s future, especially high-end technology. With the economy rebounding from initial Covid lockdowns, the leadership decided it was finally time to rein in the market.
“The plan was to grab the window with lower growth pressure to push ahead with changes,” recalled a policy adviser in Beijing.
A stalled market
Guided by the top leader’s instructions, China’s financial regulators put in place a policy dubbed “three red lines” that imposed strict debt and cash-flow targets on property developers, all but choking off liquidity for many of them.
While some analysts applauded the idea of deflating the bubble, many feared the measures were too blunt, adding to financial and economic risks by making defaults more likely.
The market stalled and developers started to collapse. That led to a sharp slowdown in construction activity, which triggered protests by homeowners furious that units they had already started paying for weren’t being finished. Sales of new properties plunged.
A common playbook in such situations calls for authorities to recapitalize stronger competitors, while hiving off the worst assets to be handled or disposed of by asset-management firms.
China did something similar in the 1990s, when then-Premier Zhu Rongji shook up a near-insolvent banking sector by moving bad loans to asset-management firms and recapitalizing state banks through government bonds.
Beijing’s response this time, however, has been more ad hoc. Rather than organize a large-scale restructuring program, it focused largely on trying to ensure developers completed construction of unfinished buildings to defuse public anger.
Last year, large Chinese banks said they would offer at least $178 billion in total yuan-denominated financial support to selected property companies. Regulators also allowed developers to extend repayment of some loans.
In the case of Evergrande, local authorities were told by Beijing to help manage completion of stalled projects and negotiate with other developers to potentially help out.
Bailing out developers such as Evergrande was off the table because of fears it would create a moral hazard and lead to more overbuilding.
But some efforts lacked follow-through, or weren’t embraced because confidence in the market was so low. Some policies conflicted, slowing the process.
One reason why Evergrande hasn’t been able to restructure its debts is the refusal by China’s securities regulator to allow the firm to issue new financial instruments. The company has said it isn’t eligible to issue new debt under China’s securities rules because its principal mainland subsidiary is under investigation.
The company had the equivalent of more than $327 billion in liabilities at the end of June. Hundreds of thousands of housing units Evergrande started or promised to build remain unfinished.
‘Band-Aid solutions’
Some analysts have questioned whether authorities’ latest move to investigate the company’s founder was intended at least in part to distract from Beijing’s failures to fully restructure the company.
Without restructuring debts, analysts say, developers such as Evergrande would either need to be put on life support by the government or face liquidation.
Beijing has also been slow to stimulate demand, fearful it could spur a repeat of previous waves of speculative buying.
Some cities prohibited “malicious” price cuts by developers who needed to unload properties so they could pay down their debts. Such moves helped keep home prices from falling much, which could destabilize society. But they also prevented the market from resettling at levels where more people would want to buy.
In the past couple of months, as more bad economic data piled up, Beijing loosened rules that had been restricting home purchases. Recent steps by China’s central bank and local governments have included cutting mortgage rates and lowering minimum down-payment ratios.
“Those are all Band-Aid solutions to stabilize the market, not to repair the market,” said Magnus of Oxford University’s China center.
More help needed
Many restrictions on home purchases remain, such as limits on the number of properties families can buy in China’s largest cities.
While most economists believe China’s banking system can withstand further pain in the housing market, the need to resolve so many debts could require recapitalization of certain segments of China’s banking sector, Goldman Sachs economists wrote in a research note in late August.
“Further policy changes are needed,” they added. A faster market recovery would require bolder steps, such as the creation of a nationwide asset-management company. Other options could include direct acquisition of distressed inventory and either demolishing properties or converting them to rental units.
“There are no indications from policy makers they will shift toward a more ‘big bang’ approach and, therefore, we maintain our view that restructuring the China property sector will likely be a gradual, multiyear approach,” they wrote.
