[Epoch Times October 16, 2021]At present, China’s real estate crisis is still lingering. With the successive defaults of real estate companies, the collective real estate dollar debt plummets, and foreign capital is flowing out of China’s bond market. And as the debt grace period of Evergrande approaches, when a substantial default is about to occur, some foreign investors are unwilling to be cut with leeks, so what are they doing?
At the same time, China’s domestic “golden nine silver ten” sales season no longer exists, the land auction market is also very bleak, and land finance is obviously unsustainable. For this reason, some cities have taken the lead in launching rescue measures in an attempt to stabilize the market. So, can these policies work? Let’s talk about these issues today.
Chinese real estate developers have successively defaulted on Evergrande’s creditors to discuss claims
At the end of last month, Evergrande had not paid interest on US dollar debt twice, totaling 131 million. On October 11, Evergrande failed to repay a debt of 148 million US dollars. The current situation is that Evergrande’s The crisis is spreading to the entire Chinese real estate market.
As you can see, on October 4, Fantasia Group’s US$206 million in debt materially defaulted; on the 11th, a small developer “Modern Land” (Modern Land) applied for a three-month delay in repaying the 250 million due on the 25th. US dollar bonds; on the same day, Sinic also issued an announcement stating that the US$250 million debt due on the 18th of this month and the last interest period may default and may trigger cross defaults on other bonds.
According to mainland media reports, affected by the “Fantasia” default event, within a week from October 4th to 9th, 44 real estate dollar bonds fell by more than 20%; on October 9th, “Modern Land” The 5 US dollar bonds issued fell across the board, of which 3 fell by more than 30%. On the same day, 13 US dollar bonds issued by many real estate companies fell between 3-10%; and in the past month, there were 140. Real estate dollar debt fell more than 20%.
This also shows that China’s real estate industry is burdened with huge debts, and Evergrande’s debt is only the tip of the iceberg. The Wall Street Journal reported that economists from Nomura Holdings stated that the scale of debt raised by Chinese real estate developers has almost doubled since the end of 2016. As of June this year, the accumulated debt has reached 5.2 trillion US dollars. , Which is higher than Japan’s overall economic output last year. Among the Chinese developers that have raised funds in the international bond market, about 40% of corporate bonds have issued a warning.
Bloomberg reported that as of September 31 this year, international rating agencies Moody’s, Fitch, and Standard & Poor’s have downgraded the ratings of Chinese real estate developers a total of 91 times, surpassing the number of times for the whole year of 2020, and also set a record for mainland developers. The number of times it has been lowered to a new high throughout the year.
Affected by the Evergrande debt crisis, foreign capital is fleeing the Chinese market. According to data from the International Finance Association (IIF), there was an outflow of US$8.1 billion in the Chinese bond market in September, the largest capital outflow in six months; and also in September, the inflow of funds from the Chinese stock market was US$1.4 billion. , Also hit the lowest value since March, well below the average of $7 billion in the past 12 months.
And next week, the 30-day grace period for Evergrande’s first default USD bond interest is coming. In addition, Evergrande’s guaranteed US$260 million bond has passed the grace period on the 8th, but so far, the market has still There is no news of payment.
According to a Bloomberg report, a law firm and an investment bank in New York are developing contingency plans for six overseas holders of Evergrande bonds holding 2.5 billion U.S. dollars. A person familiar with the matter said that creditors are considering various forms. The right of recourse includes claims under the laws of the Cayman Islands where Evergrande’s listed parent company is registered.
Once Evergrande goes bankrupt and reorganized, the situation will be very complicated because different jurisdictions including China, Hong Kong, the Cayman Islands and New York are involved. Especially at present, in terms of priority, Evergrande’s offshore bond holders may be ranked last, and unfinished properties, unpaid contractors, home buyers and domestic creditors will all take priority over overseas investors.
So far, the negotiations between these creditors and Evergrande have not received a meaningful response. Therefore, the road for these foreign investors to defend their rights seems to be equally difficult.
From the current point of view, the CCP does not intend to directly rescue Evergrande, because Evergrande itself is a private enterprise, the CCP does not care, and if it takes over too early, it will all fall into the CCP’s own hands, which is too costly. However, the CCP is also afraid that the collapse of Evergrande will cause systemic risks. Therefore, the CCP first said that Evergrande is a liquidity risk, not insolvency, and told banks not to withdraw loans. Then, it asked local governments to take over. “Whose children will take them away.” Besides, it also allows some state-owned enterprises to take over. For example, on September 29, a state-owned enterprise reached an agreement with China Evergrande Group to spend 1.5 billion US dollars to acquire Evergrande in Sheng Majority stake in Beijing Bank.
In the end, when Evergrande sells its assets seven or eighty-eight and its shareholders are unable to withstand it, the CCP may also nationalize it. Now, on the one hand, the CCP does not want to manage, on the other hand, it may not have time to take care of it, because the domestic real estate crisis has already worried the CCP.
Next, let’s take a look at the domestic situation in China.
Real estate sales fell precipitously, many places launched rescue measures
In China, real estate sales have the so-called “Golden Nine Silver Ten”. Because of the promotional activities before the “October” holiday, September is usually the hottest month of the year for residential sales. However, in September of this year, China’s There has been a cliff-like decline in residential sales.
According to the statistics of the Crane Research Center, in September, the top 100 real estate companies achieved a single monthly sales amount, a year-on-year decrease of 36.2%. Among them, 60% of the companies have experienced a year-on-year decline of more than 30%, while the sales of the top ten developers such as Evergrande, Country Garden, and Vanke have fallen by 44% year-on-year.
The monitoring data of Centaline Property also showed that during the “11th” holiday, the transactions of new and second-hand houses in first-tier cities were close to zero, and there was no trend of returning home buyers in third- and fourth-tier cities.
In addition, the second batch of concentrated land auctions across the mainland was once again “upset”.
According to data from the Zhongzhi Research Institute, as of October 12, 15 key cities have completed the second batch of centralized land auctions. A total of 121 plots have been withdrawn and 65 plots have been unsold. In addition, the average premium rate of the first round of land auctions is 15%, while the average premium rate of the second batch of land auctions is currently only 5%. Moreover, the centralized land supply in most cities is mainly sold at the reserve price. These data all reflect that the land finance in various places is no longer sustainable.
As both residential and land sales “winter” ahead of schedule, some local policies have begun to show signs of reversal.
In order to stabilize the real estate market, on October 10th, Harbin City took the lead in launching the mainland’s first comprehensive 16-point “rescue” policy. In terms of specific content, two aspects of supply and demand are emphasized. On the real estate enterprise side, measures are taken to reduce the pressure on the liquidity of the real estate enterprise; on the residential side, it is to promote the demand for housing purchase by issuing housing subsidies and relaxing the loan period.
One of the most striking is the granting of housing subsidies. According to the new policy, Harbin will provide a one-time housing purchase subsidy for qualified talents under 35 years old, among which full-time doctoral students will receive a maximum of 100,000 yuan.
Prior to this, Shenyang and Changchun in the “three northeastern provinces” also introduced similar housing subsidies in September. The shrinking demand for home purchases caused by the massive outflow of young people and the deep aging of the city is the fundamental crux of the continued downturn in the property market in Northeast China.
However, the policy announced by Harbin was surpassed the next day by Fenghua District, Ningbo City. On the 11th, the Human Resources and Social Security Bureau of Fenghua District, Ningbo City announced that students from junior college to doctoral degree can receive a housing subsidy of RMB 80,000 to 400,000. , National talents can receive a subsidy of up to 1 million yuan.
Outside the Northeast, the South also launched market stabilization measures. The “Daily Economic News” reported that in September, some banks in Guangzhou, Foshan and other places had begun to lower mortgage interest rates.
“Buy up, not buy down”, home buyers are on the sidelines
So, can these measures effectively promote the recovery of the property market?
It should be said that granting house purchase subsidies or lowering mortgage interest rates will stimulate demand to a certain extent, but this time the housing market may have limited effects and cannot play a real role.
why? In addition to mortgage restrictions, the main reason for the current housing market cooling is probably because buyers are pessimistic about the prospects of the real estate market and are very worried about the financial situation of developers such as Evergrande.
For example, the Wall Street Journal reported that some buyers said that they would not consider buying off-plan housing, that is, pre-sold commercial housing, because they were worried that the developer’s project could not be completed and it would become a “unfinished building.”
However, what is worrying is that Chinese developers rely heavily on pre-sales of off-plan homes.
For example, data from the National Bureau of Statistics of the Communist Party of China shows that in 2020, among the funds in place for real estate development enterprises, the proportion of “deposits and advance receipts” is the highest, at 34.5%; “self-raised funds” comes next, with a proportion of 32.8%. In the first eight months of this year, the proportion of “deposits and advance receipts” in the funds in place by real estate development enterprises has further increased to 38%; while the proportion of “self-raised funds” has dropped to 30.3%.
In 1994, China introduced the “Urban Real Estate Management Law,” and then began to implement the pre-sale system of commercial housing. The pre-sale system allows developers to get funds back before the completion of the project, speeding up the capital turnover, but it passes the risk to the buyers. Some real estate companies only focus on sales, not quality. “Delivery is the right protection” has become a norm, and the phenomenon of unfinished products is also emerging one after another.
However, according to media reports, at present, the pre-sale ratio of commercial housing in major cities in China is generally above 80%, and in some cities it even reaches more than 90%.
In addition, home buyers generally have the mentality of “buying up but not buying down”, although from the statistics of the CCP Statistics Bureau, from January to August this year, the national average price of commercial housing was 10,425 yuan, which is still higher than last year. However, the September data has not yet been released, and the current market is full of pessimism.
Moreover, it can be seen from media reports that many cities are selling properties at price cuts. At present, at least 15 cities have introduced “restriction orders” for house prices. And there are data showing that consumers believe that house prices may fall. According to a survey released by the Central Bank of the Communist Party of China, in the third quarter, the proportion of Chinese urban depositors expecting house prices to rise fell to 19.9%, down from 25.1% a year ago and the lowest level since the first quarter of 2016.
Especially at present, many cities across the country have introduced the “Guide Price for Second-hand Housing”, and Beijing has also recently released a new policy for the pilot price of second-hand housing in Haidian District, which stipulates that from October 8th, new housing in relevant communities The listed price of the source shall not exceed the guide price. A reporter from the Securities Daily found that the guide price of second-hand housing is equivalent to a 20% discount compared to the market price.
In February this year, in order to cool down the real estate market, Shenzhen first implemented the guidance price of second-hand housing, and the effect was remarkable. In August, the transaction volume of second-hand housing in Shenzhen was only 2,043, a year-on-year drop of more than 80%, a record low in the past 10 years; and the price of second-hand housing has fallen for 4 consecutive months.
The most important reason for the sharp decline in the transaction volume of second-hand housing is that banks will use the guide price of second-hand housing as the basis for lending. If the transaction price of a second-hand house is higher than the guide price, but the bank lends at the guide price, it means that the buyers will get less loans and the financial pressure will increase.
Just like a recent hot post on the Internet, a friend in Dongguan said that he bought 6 million houses for his children to go to school with frugality, but was instructed to get 3 million, so his wife wanted to divorce him. He now pays more than 21,000 yuan in mortgages every month. For a house with a market value of 3 million, this friend has already paid 1.8 million, but still has to repay a loan of 4.8 million, which he cannot accept.
Therefore, from our analysis, the Beijing authorities’ regulation on real estate will only partially relax. Generally speaking, the winter in the real estate market will continue.
Institute of Finance and Economics
Planning: Yu Wenming
Written by: Li Songyun
Editor: Wei Ran, Yu Wenming
Editing: Songs
Producer: Wen Jing
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