Real estate renovation in China is too cosmetic

Reuters
Reuters

HONG KONG (Reuters Breakingviews) – China’s ailing real estate sector is proving to be in for a tough job of repairing. The sluggish economy and pandemic-related lockdowns have only increased the degree of difficulty. Policymakers are digging deeper into the toolbox, but a lack of faith in the industry‘s underpinnings is making it harder to rebuild.

The People’s Bank of China recently joined broader efforts to help, lowering the benchmark five-year lending rate by 15 basis points to 4.45%. Local governments also dropped restrictions, such as Harbin’s ban on homeowners selling within three years of buying, according to credit analyst CreditSights. Other regions have reduced down payment rates while banks in some major cities have accelerated mortgage approval times.

These movements have only a limited effect, however, as potential buyers fear that their builder will collapse. Sales of new homes in the first four months of the year, after rising 5% in 2021. At least 18 developers, including Guangzhou R&F Properties and Redco Properties, have this year swapped maturing offshore debt for new banknotes, according to a study by Goldman Sachs. . Most of these bonds are still trading at 30% or less of face value, implying that investors are unconvinced that the extensions improve their chances of being redeemed. Small wonder: four of them have defaulted since the exchange.

Without stabilizing developers, it’s hard to see how the increase in demand will make much of a difference. Chinese authorities have encouraged stronger companies to buy up weaker rivals, but that’s a tough sell with retreating banks. Domestic loans to developers fell 24% in the four months to April 30 from the same period a year earlier. The opaque bankruptcy and training processes don’t help either. Two small operators that collapsed a few years ago and owed between them $1.5 billion in offshore debt have yet to make material progress in resolving their cases. This is hardly encouraging for bargain hunters.

Chiseling the effects of an out of control real estate market requires a tougher resolve. Beijing is capable of this, as evidenced by the strict restrictions imposed on developers in the first place. Circumstances have changed, however, and cheaper mortgages won’t pay much. If China really wants to support real estate developers, it will need a bolder economic plan.

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BACKGROUND NEWS

– On May 20, China’s central bank lowered the five-year policy rate from 4.6% to 4.45%, a bigger cut than the 5 basis points to 10 basis points that had been expected.

– Residential property sales fell 32% in the first four months of 2022 from a year earlier, according to figures released May 19 by China’s National Bureau of Statistics.

(Editing by Jeffrey Goldfarb and Katrina Hamlin)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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