After two years of falling sales, near bankruptcies of real estate developers and abandoned buildings under construction, Beijing is settling on a rescue plan for the sector. In recent weeks, several measures have been announced, or mentioned, to relaunch a sector which provided, until 2021, around 25% of Chinese GDP. The proposed approach should take several channels: a classic recovery plan through infrastructure to support construction; the renovation of certain neighborhoods in large cities; the development of social housing. “These initiatives could be used to bail out developers in a roundabout way, for example by purchasing their assets, or even to stabilize the sector and boost the confidence of home buyers”estimates the consulting firm Gavekal Dragonomics, based in Beijing, in a note dated November 27.
The government also announced more direct aid: the release of funds to help developers in need of liquidity, thanks to a “white list” of 50 promoters, public and private, approved by Beijing. On paper, these measures taken over the last few weeks have enough to reassure a sector on the brink of collapse. Investors also reacted positively: Chinese developers jumped on the stock market by 7.6% on November 21, the day after the announcement, according to a report from the Bloomberg agency. Some, like Sunac, soared 27%.
However, we must put things into perspective: many of these promoters are starting from a weak base, after having suffered regular declines on the markets since the start of the crisis two years ago, when the giant Evergrande stopped paying its debts. Since then, dozens of companies have defaulted and left thousands of suppliers and subcontractors unpaid. This summer, the difficulties of Country Garden, a giant nevertheless considered solid, have rekindled concerns. Recently, Vanke, a developer majority-owned by the city of Shenzhen, found itself in dire straits, forcing the metropolis to act as guarantor. Despite a series of measures adopted to facilitate property purchases and significant reductions in interest rates, sales continue to fall: – 28% for the 100 main Chinese developers in October, while investments are at their lowest for eight years.
New debts
The whole question is whether these announcements will have the desired effect: because their implementation is not easy, as the finances of local governments are under pressure. Success will depend on the involvement of the central government, which retains room for maneuver, thanks to its low debt. On October 24, Beijing announced the issuance of 1,000 billion yuan (127 billion euros) of additional sovereign debt, to finance infrastructure projects, in particular to rebuild and protect cities against climatic hazards, after Significant flooding in the north-east of the country during this summer. These new debts bring the budget deficit to 3.8% of GDP. A small revolution: traditionally, most investments were carried out by local governments.
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