China’s Property Plan Looks More Like a Bandage Than Bailout
Xi Jinping has sprung some pleasant surprises on markets since securing his third term as China’s leader last month. Not least a 16-point (count ’em) plan to bolster an imploding property sector.
Investors like the initiative, which, among other things, backstops “high quality” developers with big credit extensions and the right to access some escrow funds that buyers have prepaid for their apartments. The Global X MSCI China Real EstateCHIR –5.45% exchange-traded fund (ticker: CHIR) has jumped by a third in the past week, paring its year-to-date loss to a mere 30%.
But Beijing’s emergency measures only go so far, and they may have gone there already. “The first leg of the rally was sentiment,” says Vivian Lin Thurston, an emerging markets portfolio manager at William Blair. “To go up from here, you need to see some fundamental macro recovery.”
That could take a while, given the depth of the hole Chinese property has dug. New home sales are down by half this year, Thurston reports. More than half of Chinese developers’ high-yield dollar bonds are in default, adds Joyce Bing, a Hong Kong–based investment manager at asset manager abrdn. Hapless families who paid for unbuilt apartments have mounted “mortgage strikes” in nearly 100 cities.
Animal spirits probably can’t return to real estate until Xi’s government lifts “zero Covid” restrictions on physical mobility, which looks elusive despite parallel measures on that front. Meanwhile Chinese developers face a fresh liquidity crunch: $72 billion in offshore bond payments in early 2023, a 35% jump from this quarter, plus settlements with contractors that traditionally come due at Lunar New Year.
Foreign investors, who feasted on developers’ double-digit yields in better times, are literally the last thing on Beijing’s mind as it lines up its 16 points, says Samy Muaddi, portfolio manager for T. Rowe Price ’s emerging markets bond strategy. Mandarins will focus, logically enough, on completing half-built projects and protecting their own banks. “There’s a hierarchy of capital flow in China, and foreign equity and bondholders are at the bottom,” he says.
China is also heading into four months of bulldogs-beneath-the-carpet political turmoil, Bing notes. While the Communist Party Congress cemented Xi’s supremacy, line positions critical to the property rescue’s implementation will be up for grabs until a new government takes shape next March.
What’s nearly certain is that Xi wants to manage the decline for Chinese real estate, not restore its former headlong growth. A raft of measures aimed at discouraging “speculators” and lowering prices for “genuine” buyers remain in place: including bans on second-home mortgages, price caps in top-tier cities.
The vague but sweeping goal of redirecting China’s enormous household savings—more than twice the U.S. level proportionally—toward more “productive” avenues also remains in place. “They would prefer that the savings pool go into equity or bond funds, and bank lending toward job creation, not mortgages,” says Andrew Mattock, portfolio manager for Matthews Asia’s China Fund.
How Xi & Co achieve this shift is less than clear. It’s a bad look for developers, though. Equities manager Thurston is looking for consumer-facing companies, not real estate, to benefit from a post-zero Covid rebound. “Property’s structural growth story in China is over,” she says.
Bond investor Muaddi is underweighting China in favor of high-yielding sovereign issuers like the Dominican Republic, Ivory Coast, and Morocco. “These credits can provide similar returns with much better visibility,” he says.