China's domestic real estate market has seen a "cold winter" in the second half of the year under the combination of multiple policies for real estate enterprises and the strengthening of restrictions for financial institutions. The market sales have slumped significantly, and some highly indebted real estate enterprises, with Evergrande being one of the better-known, have defaulted one after another.
This not only brings panic to the property market, but also touches the nerves of the capital market. There is great concern both at home and abroad that a contraction in the real estate market will hit the Chinese economy and have a spillover effect on the global market.
The Chinese central bank has recently responded to questions about Evergrande and the real estate market, generally framing the volatility in the real estate market as a market risk, which to some extent has the calming effect on the market. This has also led many market participants to judge that the overall real estate market policy has "bottomed out" and that there are signs of relaxation and even the possibility of a turnaround.
In this regard, ANBOUND researchers believe that the current "signs" of relaxation still belong to the implementation level. In terms of the overall tone, the Chinese real estate industry will still adhere to the idea of deleveraging and de-financialization to promote the rational return of the real estate market. In the case of market contraction, moderate relaxation is conducive to the stability of the real estate market. A steady progress after all, is the most suitable for China's needs.
The default of housing companies brings about three chain reactions. The first is to raise the impact of financing financial institutions, as bad debt losses will offset the capital of financial institutions, which in turn will affect the expansion of their financial business and cause contraction. At present, the market and regulatory aspects are most concerned about the continuous transmission of risks along the financial chain that triggers systemic risks.
Secondly, for home buyers, the fact that a large number of construction projects cannot be completed as scheduled not only exposes them to property losses, but may even cause social problems. The market risk may turn into social risk, and this has become a concern of the regulators. Most local governments and housing and construction departments are currently protecting the rights and interests of homebuyers to some extent through prepayment supervision, segregation and other measures to prevent housing enterprises from illegally taking funds. For example, some large-scale real estate companies such as Evergrande are encountering problems. Such risk does pose a certain threat to the local government, but the local government can intervene and solve these by means of project companies to close the funding cycle and promote the successful completion of the project legacy problems.
Thirdly, after the real estate company defaults, for upstream and downstream builders and suppliers, they will face a large amount of unrecoverable losses in terms of payment or construction funds, which makes the fluctuation of the real estate market further impacting the steel, cement and other building materials industries and construction industries. This means that fluctuations in the real estate market may have a rather profound effect on the real economy.
We believe that the current situation and problems of the real estate market are crucial in the Chinese economy. Judging from some recent regulatory attitudes and movements, ANBOUND researcher noted that the current unprecedentedly strict policy environment is showing signs of relaxation in the face of a "cold snap" in the real estate market.
Zou Lan, director of the financial market department of the People's Bank of China, said recently about the debt problem of Evergrande Group, "The problem of Evergrande Group is an isolated case in the real estate industry". Zou Lan stressed that after the real estate macro-control in recent years, especially after the establishment of the real estate long-term mechanism, the Chinese real estate market land price, housing price and expectation remain stable, most real estate enterprises operate soundly, where there is reasonably good financial indicators and healthy real estate industry.
Among the total liabilities of Evergrande Group, financial liabilities are less than one-third, and creditors are also relatively dispersed, while the risk exposure of individual financial institutions is not large. In the consideration of regulatory authorities, the signs of real estate market decline caused by Evergrande are still regarded as market risks, and the possibility of triggering systemic financial risks is limited, therefore, for some real estate enterprises in default such as Evergrande, the regulatory rescue will focus on preventing the spread of risks rather than "bailout". For the real estate market and financial market, this is conducive to the stability and clearing of the market, but it will not be good news for Evergrande and other problematic real estate companies, because there are still great unknowns as to whether it will survive in the future.
In addition, regarding the fall in the price of U.S. dollar bonds of foreign real estate companies caused by default, Zou Lan also said that this is a natural reaction of the market after the incident of default, and there is historical precedence. For example, after the Huarong Group's risk a while ago, the market's risk aversion sentiment rose sharply, and the stock prices and bond prices of other asset management companies also fell, making it difficult to refinance. But with the successful introduction of strategic investment in Huarong in August, the discount on overseas bonds narrowed rapidly and market sentiment was restored. Zou Lan stressed that debt issuers and their shareholders will be urged to strictly abide by market discipline and rules, properly handle their own debts in accordance with market and rule of law principles, and actively fulfill their statutory debt servicing obligations. From the central bank's statement, it appears that the fluctuation of bond prices is the reaction of the market default situation, and did not trigger a liquidity crisis as in the case of the "mine-out" of Baoshang Bank, so the overall financial risk is in a controlled state. This will help the capital market to further stabilize market expectations. Such change also means the capital market recognizes the stability of the housing market.
Regarding the credit policy of the real estate industry, Zou Lan further pointed out that some financial institutions have misunderstood the "third-lines and fourth-files" financing management rules of the 30 pilot real estate companies, in which the balance of interest-bearing liabilities of "red file" companies should not be increased was erroneously thought to mean that banks shall not issue new development loans.
"After the company's sales repayments have repaid the loans, new projects that should have been reasonably supported cannot get loans, which to a certain extent has caused some companies' capital chains to tighten". Banks may adjust the current tight real estate credit policy in the later stage, and the financing environment of real estate enterprises will face a certain degree of improvement. If the fourth quarter passes without major incidents, with the release of credit lines in the new year, the liquidity of real estate companies will continue, which will bring some changes to the financial pressure on the real estate market. In fact, since September, the Chinese central bank has also repeatedly talked about financial support for the real estate industry to ensure the rational and reasonable development of the market.
From this point of view, the regulators do not exactly suppress the reasonable development of the real estate market. Rather, it is to guarantee that the real estate industry maintains a reasonable development space under the principle of "housing, not speculation", and gradually stripping it away its financial attributes. In other words, under the circumstances that the real estate market has an important impact on the entire economy, there will be a moderate relaxation in policy implementation in the future, but it is not an overall policy shift.
Final analysis conclusion:
Chinese central bank officials are releasing signs of easing in housing-related policies in the face of continuous defaults by real estate companies and a shrinking real estate market. This relaxation is more for risk prevention and is an adjustment of "strict supervision", rather than aiming to encourage and promote the development of the real estate market again. The central bank officials' explanation shows that stable development is still the most appropriate means for China's current needs.
