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IDLE LANDS
Turn those machines back on! This morning, the People’s Bank of China established nationwide minimum down payment requirements for both first- and second-time homebuyers at 20% and 30%, respectively, as of Sept. 25, replacing a regional framework that featured down payments of as high as 80%. The central bank likewise encouraged local banks to trim existing mortgage rates, as authorities look to arrest a downward spiral in the lynchpin property realm, which accounts for up to one third of total domestic output by some estimates.
“The reduction in the interest rate of existing housing loans can save interest expense for borrowers, which helps expand consumption and investment,” the PBOC states. Sales among China’s 100 largest developers sank 33.9% from last year in August, data released today show, roughly matching declines seen in July and June, while new bank loans tumbled to RMB 349 billion ($48 billion) last month per data provider Wind, down nearly 50% year-over-year and the lowest monthly reading since 2009.
Will Beijing’s machinations help turn the tide? Overseas investors aren’t waiting to find out, undertaking a net $12.4 billion in net equity sales during August per the Financial Times, easily the largest monthly outflow since China introduced its Stock Connect foreign investment portal in 2014. “Nobody expects a big bang on the fiscal front anymore,” Alicia GarcĂa-Herrero, chief Asia-Pacific economist at Natixis, told the pink paper. “Now, investors’ clients are focused on the real estate sector policy – that’s the new mantra.”
Recent occurrences underscore that sentiment shift: developer China Evergrande Group received a rude welcome from Mr. Market, as shares plummeted as much as 87% after a 17-month halt in connection with its 2021 default on dollar-pay bonds. Evergrande, which has seen its market capitalization shrivel to $460 million from more than $50 billion six years ago, posted a $4.5 billion net loss in the first six months of the year, while total liabilities as of June 30 towered at $329 billion, compared to $240 billion in assets.
While the travails of Evergrande – likened to the doomed dirigible Hindenburg by Grant’s Interest Rate Observer in the summer of 2017 – have long been in public view, mushrooming trouble at what was once China’s largest property player by sales brings the industry’s mounting woes into sharp relief. Yesterday, Country Garden Holdings Co. reported a record $6.7 billion net loss over the first half of the year, down from an $84 million profit over the same stretch in 2022. Though revenues jumped 39% over the same period, efforts to “ensure punctual delivery of finished properties” led Country Garden to “str[ike] a balance between sales volume and selling price at some of its property projects,” as management put it.
A default of its own may, meanwhile, be in the offing, as Country Garden requested a 40-day grace period from creditors on a renminbi-pay bond maturing next week, with the conclusion of a grace period to repay $22.5 million of dollar-note coupons looming in early September. Country Garden, appraised at the equivalent of double-B at both Moody’s and S&P as recently as November, was cut to double-C at Moody’s this morning, with the rating agency citing “tightened liquidity and heightened default risk, as well as the likely weak recovery prospects for the company’s bondholders.” The firm’s $1 billion worth of first-lien, 8% notes maturing in January last changed hands at less than 13 cents on the dollar.
“With or without an official default, Country Garden will no longer be able to grow, and we have doubt on its ability [to continue] as a going concern,” analysts at JPMorgan Chase warn. The investment bank predicts that Chinese property firms will account for nearly 40% of global default volumes during calendar 2023.
More broadly, the crumbling real estate edifice poses no small risk to the Middle Kingdom’s fixed-asset driven growth miracle, one accompanied, of course, by heaping portions of debt. See “China isn’t working” in the brand-new edition of Grant’s Interest Rate Observer for more on the ripple effects that may ensue from an extended stretch of trouble within the world’s second-largest economy.
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