China’s bid to rein in its debt-ridden property market has become a high-stakes balancing act: clamp down on excessive real estate construction without squeezing so hard that it sends developers under.
Even as Beijing doubles down on reducing the Chinese economy’s reliance on the country’s vast real estate sector, authorities are loosening restrictions on lending and home approvals to avoid a market collapse amid a liquidity crisis that has pushed developers such as China Evergrande Group close to bankruptcy.
Bank credit is being rolled out to property firms at a higher level than in any period during the second quarter or third quarter, according to data collected by China Beige Book International, with mortgage lending in October increasing to 200 billion yuan ($31bn) from 150 billion yuan ($23.5bn) the previous month.
In Chengdu, the capital of the southwestern province of Sichuan, officials are accelerating approvals for home sales and property loans, while easing restrictions on using proceeds from pre-sales. Because cash-strapped developers have become reluctant to make bids for land – which are a key revenue source for municipalities – some cities have begun relaxing rules for land parcel sales.
“Beijing wants to ensure that there’s sufficient liquidity to maintain construction in the property sector,” Janz Chiang, an analyst at Trivium China in Beijing, told Al Jazeera. “But it also doesn’t want a sudden flow of easy credit – the very practice it has been trying to stamp out for years. So, their challenge is to find out where that magic point between sufficient liquidity and preventing a reinflation of the property sector will be.”
Shehzad Qazi, managing director of China Beige Book International, told Al Jazeera there were signs of increased borrowing across the economy as a whole.
“Property firms are actually leading the pace with bond issuances as well,” Qazi said. “Not only are they seeing recovery in lending through banking channels, but they are also clearly being provided the space to sell bonds to plug the holes in their businesses too.”
Qazi said that keeping track of non-bank lenders would be a key indicator of the market’s direction going forward.
“In the third quarter, we saw historic levels of non-bank lending in the sector with 46 percent of all loans taken by property firms coming from shadow lenders such as trust companies or small loan firms,” he said. “The state-controlled banks were not loaning to private companies at all, so they had to resort to non-bank lenders.”
Nonetheless, Beijing has indicated it will not deviate from its “houses are for living, not for speculation” campaign.
In an essay earlier this month, Vice Premier Liu He said officials should “focus on stabilising land prices, house prices, and stabilise expectations,” in order to “solve household’s housing problems and promote the healthy development of real-estate companies”.
“Top officials have made it crystal clear that they are satisfied with their policies and have also consistently reiterated their intentions to cool the market,” said Chiang.
“While they are most likely to continue with their policy trajectory to cool the property market, we expect some degree of credit control loosening from banks after regulators indicated that their excessive reactions to policies are to blame for the slowdown.”
China’s real estate sector accounts for more than a quarter of the nation’s economy, which officials have cast as a threat to economic stability. Eight of the 10 most-indebted property developers are based in China, and Beijing was aware of the problem of overleveraging even before Evergrande’s debt binge sent investors reeling.
In August 2020, Beijing began restricting borrowing with the “three red lines” policy, which stipulates that developers looking to refinance need to have a 70 percent ceiling on liabilities to assets, excluding advance proceeds from projects sold on contract, a 100 percent cap on net debt to equity, and a cash to short-term borrowing ratio of at least one.
The restrictions have contributed to a fall in new construction, house sales and house prices this year. Growth in real estate investment, which peaked at 38.3 percent in January, dropped to 21.6 percent in April, 10.9 percent in July, and 7.2 percent in October.
“There is the realisation that the former growth model – which involved high levels of debt, high levels of investment, and high levels of growth – doesn’t work anymore,” said Qazi. “Beijing realises that it needs to shift to a more sustainable model, which means a slower pace of growth.”
But Qazi said Beijing appeared to be taking a flexible approach to restructuring the sector.
“Beijing is working with local governments in some 200 cities where Evergrande has unfinished projects,” he said. “They’re creating task forces to evaluate the status of these unbuilt properties and transfer them to new developers so Chinese households are delivered what they’ve paid for. Here the government is adopting a flexible policy vis-a-vis leverage, by allowing for the outstanding debt on these properties to stay off those developers’ balance sheets.”
‘Balanced and sustainable growth’
Sam Xie, head of research at CBRE China, told Al Jazeera that while there were signs banks had expedited loan approvals for reasonable financing needs, he did not expect any major loosening of lending in the near term.
“The policy stance remains that ‘housing is for living in, not for speculation’, and the ‘three red lines’ remain firmly in place to curb excess speculation and overleveraging in the sector,” Xie said.
According to CBRE, Chinese-listed developers will have almost $100bn in corporate bonds expiring in the next two years.
“As such, highly leveraged developers are expected to continue their focus on offloading non-core assets and put off any aggressive expansion plans while the authorities’ emphasis remains on balanced and sustainable growth,” Xie said.
Chiang, the Trivium China analyst, said Beijing’s policy was driven by a long term view of the market.
“Regulators likely believe that once the temporary correction blows over, the sector will be healthier than before, which is precisely what they have been working towards for years,” she said. “Policymakers won’t let this crucial sector starve to death, so some policy rejiggering is possible and looks increasingly probable. We have seen some level of easing up, such as encouraging developers to issue bonds on the interbank market. Still, an all-out U-turn on tight property policy is not in the cards.”