Commentary
As China’s real estate sector woes deepen, hitting developers and local budgets, policy support from Beijing is on its way.The Chinese Communist Party (CCP) has mobilized its so-called national asset managers to support its tottering real estate developers and avert a full-on property market collapse.
The asset management companies, which include China Huarong Asset Management, China Cinda Asset Management, China Great Wall Asset Management, and China Orient Asset Management, were originally set up in the 1990s after the Asian financial crisis in order to buy bad loans from Chinese commercial banks’ balance sheets.
More recently, Bloomberg reported that these asset managers were told by the CCP to actively participate in the restructuring of real estate developers that need funding and to acquire loans and projects from developers to free up cash and avoid further defaults.
Huarong had been mired in its own crisis until recently. After years of making questionable acquisitions, Huarong’s former Chairman Lai Xiaomin was executed in Jan. 2021 for various malfeasance, including bribery.
What’s interesting is that while regulators have urged the managers to engage developers on an arms-length basis and to comply with financial risk management, apparently making a “profit” on the real estate deals is of secondary concern, according to the report.
Separately, China’s Cailian news agency revealed in February that many central state-owned enterprises (SOE) are scouring for deals, from negotiating real estate project acquisitions to mergers and acquisitions with developers. Thus far, the SOEs have been averse to taking on too much risk—not many deals have been announced—but a call from CCP headquarters could speed up the process.
This development suggests that Beijing has been less than impressed with the liquidity management efforts by real estate developers such as Shimao, Evergrande, Sunac, and Country Garden. Developers have been unable to sell properties quickly enough to free up cash to continue funding new projects.
Initial data from January shows that the sales of new homes were anywhere from 10 percent to 80 percent lower than the same month in 2021 for more than a dozen Chinese developers, which were hit by both lower contracts and lower contracted prices.
That puts a tough strain on cash flow, which is required to begin and continue existing projects.
Developers have also been facing a credit crunch. Property developers raised 70 percent less in bond financing in January compared to January 2021. The offshore dollar-denominated debt market, catering to foreign investors, has been frozen since a slew of defaults in 2021 and downgrades by international credit rating firms.
While Beijing regulators have slowly loosened restrictions on leverage for property developers, the engagement by bad debt managers and other SOEs suggests that the industry is in an even weaker position than originally thought.
Aside from developers and home buyers, local governments have been collateral damage to China’s real estate market issues.
We’ve previously said land sales and land use leases to real estate firms make up a large portion of local government revenues. And initial readings from 2022 could spell trouble for government coffers. Local and regional governments, like property developers, are also hugely indebted and have high debt service costs.
From Chinese business publication Caixin: “Several provinces lowered their budget targets for land sales revenue, with Beijing, Shanghai, Zhejiang, and Qinghai all expecting declines of at least 10 percent. Anhui set a budget target of 3.9 percent growth, significantly slower than the 13.2 percent growth in 2021.”
A potential reprieve on the horizon is property taxes, which China has been piloting across several cities. But is it enough? If the newly released plans of Shanghai’s property tax regime are anything to go by, the answer is that it’s unlikely.
Taxes are only levied on properties bought in 2011 or later. For homes purchased after 2011, there’s a 60 square meter (645 square foot) exemption per capita. Then there’s another 30 percent cut on the remaining taxable area. The truly taxable real estate area is then taxed at a 0.6 percent rate on the price paid per square foot.
Perhaps that’s a large sum for a city as densely populated as Shanghai, but it’s hardly a windfall for most municipalities.
Will these efforts be enough to calm the market jitters, or are they merely reordering chairs on the Titanic? Time will tell.
