A Recovery in China’s Property Market? Not So Fast.
Three red lines? What three red lines?
China’s stunning policy U-turn hasn’t excluded real estate, which in better times powered a quarter of the No. 2 economy. Developers, who the government decided two years ago were overleveraged, were supposed to comply with the three infamous financial limitations by June 2023. Authorities are easing back that deadline now, if not junking it altogether. “Forestalling and defusing risks in the sector is the bottom line,” housing minister Ni Hong said recently.
Beijing has backed that dovish line with a raft of stimulus measures: soft credits for beleaguered builders, lowering mortgage rates and requirements. Investors like it. The Global X MSCI China Real Estate exchange-traded fund (ticker: CHIR) has gained 60% from a trough in October. Developers’ dollar bonds have done better than that, erasing most of the past year’s losses, says Tracy Chen, a portfolio manager for global credit at Brandywine Global.
If you blinked through this rally, you might have missed it, unfortunately. More volatility is likely to come. “The market is probably running ahead of itself,” Chen says.
Beijing may have handed its traumatized real estate sector a shovel. Digging out still won’t be easy. Builders defaulted on 140 different bonds worth $50 billion last year, Bloomberg reported. Housing prices, which increased 80-fold over two decades, have fallen for 15 straight months.
Recovery will require buy-in from a chain of now gun-shy market players, Chen says. Banks are reluctant to lend to developers, despite official exhortations. Developers are reluctant to buy land for new building. State-owned developers are slow-walking buyouts of flailing private peers to consolidate the market.
Most important, consumers have seen that prices can fall as well as rise, and won’t be in a rush to buy again. “The key is confidence, which is still weak for now,” says Larry Hu, chief China economist at Macquarie Group.
The state retains its long-term goal of easing China’s property addiction, and shifting supply from the most profitable luxury developments to subsidized affordable ones. It aims to staunch the sector’s bleeding without reigniting “wild speculation,” says Michael Kelly, head of PineBridge Investments’ multi-asset strategy.
Concretely that means targeting support to a dozen or so “quality developers,” and letting the rest fend for themselves. “A lot of private developers will go through restructuring,” Kelly says. “Maybe 20% will restructure to the point of not getting your money back.”
Some of the deserving quality developers are already telegraphed, including No. 2 China Vanke (2202.Hong Kong) and No. 6 Country Garden Holdings (2007.Hong Kong). Investors are still guessing at others, always a risky business in China.
Rising valuations are decreasing the offsetting rewards for such tea-leaf reading. Kelly estimates the average yield on his portfolio of “money good” Chinese developers’ bonds has dropped from 15% to 11% within the past month or so. It’s now about four percentage points better than what he projects for U.S. high-yield paper this year. “The trade is no longer crazy attractive,” he says.
Developers’ stocks he finds not attractive at all. Those stocks are a sliver of China’s equity market, but a bellwether for the economy. Property accounts for 70% of Chinese households’ net worth, by some estimates.
The country’s vaunted reopening will only go so far if the housing market can’t find a durable footing. Xi Jinping’s people haven’t found it yet, though they are trying.