China property: $150bn is not enough to lift sector out of its slump

Beijing wants to revive millions of stalled property developments with loans worth up to Rmb1tn ($148bn). Bidders that previously spurned assets of troubled developers such as Evergrande are warming to them.

Neither factor is enough to catalyse a lasting turnround. The sector is struggling with a plunge in the price of properties and the bonds that finance them. The backdrop is a Chinese economy that slowed to just 0.4 per cent in the second quarter.

People’s Bank of China will provide about Rmb200bn of loans at about 1.75 per cent a year to local banks. The funds should fill part of the funding gap needed to complete unfinished apartments. Developers suspended construction of these when they ran out of funds to pay contractors.

Local developers have relied on a flow of new sales contracts and large deposits from customers buying off plan. This model is creaking for two reasons. First, would-be buyers are staying away. China’s property sales are likely to drop by about 30 per cent this year, estimates S&P. Home prices fell for the tenth month in May.

Second, a growing number of homebuyers are refusing to pay mortgages on properties where contractors have downed tools. This is expected to affect more than $140bn worth of loans.

Meanwhile, potential buyers are finally emerging for the Hong Kong assets of troubled mainland developers. State-owned Yuexiu Property pulled out of a deal to buy China Evergrande’s Hong Kong headquarters in October. The real estate unit of Hong Kong’s richest tycoon, Li Ka-shing, has now made an offer for the building — which has an expected value of more than $1.2bn.

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Local developers cannot rely on asset sales to dent their massive debts. Evergrande Group, for example, has about $300bn in liabilities.

Hong Kong’s property market, once seen as recession proof, had retained value better than the mainland. It is now showing signs of stress too.

An expatriate exodus has pushed Hong Kong’s premium office vacancy rate to 12 per cent in June, the highest in two decades. Local property groups including Li’s CK Asset have been building new offices, adding to oversupply. An estimated 4mn sq ft of new offices will be added this year.

Western predictions of a crash in Chinese property dragging down the financial system remain wide of the mark. The outlook is instead for slow, attritional correction. The authorities will keep some parts of the industry on life support and let others expire.

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