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For China, a high-stakes balancing act to reduce real estate Property

China’s bid to sustain its debt-ridden goods market has become a high-stakes balancing act: holding on to overpriced real estate construction without squeezing it so hard that it sends developers down.

While Beijing has doubled its reliance on the Chinese economy’s dependence on the country’s vast real estate sector, authorities are raising restrictions on loan and housing approvals to prevent market collapse amid a liquidity crisis that has pushed developers like China Evergrande Group close to bankruptcy.

Bank lending to real estate companies is expanding at a higher level than in the second or third quarter, according to data collected by China Beige Book International, as mortgage loans rose to 200 billion yuan ($ 31 billion) in October. 150 billion yuan ($ 23.5 billion) in the previous month.

In Chengdu, the southwestern capital of Sichuan, officials are accelerating home sales and property credit approvals, easing restrictions on the use of pre-sales profits. As developers who lack cash have become reluctant to make land bids – which are a key source of municipal revenue – some cities have begun to ease the rules for the sale of land plots.

“Beijing wants to ensure that there is enough liquidity to sustain construction in the real estate sector,” Janz Chiang, a Beijing analyst at Trivium China, told Al Jazeera. “But they also don’t want a sudden flow of simple loans, the same practice they’ve been trying to eradicate over the years. So their challenge is to know where that magic spot will be and that will prevent this real estate from re-inflation in the real estate sector.”

Shehzad Qazi, managing director of China Beige Book International, told Al Jazeera that there are signs of increased indebtedness across the economy.

“Property companies are also moving at a pace in bond issuance,” Qazi said. “In addition to stimulating lending through banking channels, they are also providing space to sell bonds to cover gaps in their businesses as well.”

Qazi said monitoring non-bank lenders would be a key indicator of market direction.

“In the third quarter, we saw a historic level of non-bank lending in the sector, coming from 46 percent of all loans taken by real estate companies from shadow lenders, such as trust companies or small business loans,” he said. “State-controlled banks did not lend to private companies at all, so they had to turn to non-bank lenders.”

Evergrande developer’s troubled liquidity crisis raises concerns over health in China’s real estate sector
[FILE: John Sibley/Reuters]

However, Beijing has stated that it will not shy away from the “houses are for living, not speculation” campaign.

In an attempt earlier this month, Deputy Prime Minister Liu He said officials should “focus on stabilizing land prices, stabilizing house prices and expectations,” “solving housing problems and promoting the healthy development of real estate companies.”

“Top officials have made it clear that they are happy with their policies and have also repeatedly reiterated their intention to cool the market,” Chiang said.

“It is likely to continue their policy trajectory to cool the real estate market. We hope to somehow loosen credit control from banks after regulators are blamed for slowing down their excessive reactions to policies.”

China’s real estate sector accounts for more than a quarter of the nation’s economy, and officials have seen it as a threat to economic stability. Eight of the 10 most indebted real estate developers are headquartered in China, and Beijing was aware of the problem of over-utilization, even before Evergrande’s debt piles scared investors.

In August 2020, Beijing began to reduce lending with a “three red line” policy, which stipulates that developers who want to refinance must have a 70 percent limit on asset liabilities, excluding advances from projects sold under the contract, a 100 percent limit. net debt to equity, and at least one cash and short-term debt ratio.

The cuts have led to new construction, home sales and a drop in house prices this year. Real estate investment growth peaked at 38.3% in January, fell to 21.6% in April, 10.9% in July and 7.2% in October.

“It is noticeable that the old growth model, which had high debt levels, high levels of investment and high levels of growth, no longer works,” Qazi said. “Beijing realizes that it needs to change to a more sustainable model, which leads to a slower pace of growth.”

But Qazi said Beijing was taking a flexible approach to restructuring the sector.

“Beijing is working with local governments in 200 cities with Evergrand unfinished projects,” he said. “Working groups are being set up to assess the condition of these undeveloped properties and transfer them to new developers to deliver what is paid to Chinese houses. Here the government is taking a flexible policy on the lever to allow the debt of these properties to be off the balance sheets of these developers.”

“Balanced and sustainable growth”

Sam Xie, head of research at China’s CBRE, told Al Jazeera that while there were signs that banks had accelerated loan acceptance for reasonable financing needs, he did not expect much to release loans in the short term.

“The policy stance continues to be‘ housing is for living, not speculation ’, and the‘ three red lines ’remain firm to reduce over-speculation and over-exploitation in the sector,” Xiek said.

According to CBRE, listed Chinese developers will receive nearly $ 100,000 million in corporate bonds that will expire in the next two years.

“As a result, high-yield developers are expected to unload non-core assets and reverse an aggressive expansion plan, while the authorities put it in a balanced and sustainable growth,” Xiek said.

Chiang, a Chinese analyst at Trivium, said Beijing’s policy was driven by a long-term view of the market.

“Regulators believe that once the interim amendment is completed, the sector will be healthier than before, and that is precisely what they have been working on for years,” he said. “Politicians will not starve to death in this crucial sector, so policy change is possible and increasingly likely. We have seen some degree of mitigation, such as encouraging developers to issue bonds in the interbank market. However, not reversing the tight property policy is on the cards “.




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