Nearly a month after the Evergrande crisis went to 10, sending property sector bonds crashing to near record lows and sparking a sharp swoon in China's property sector, the country's central bank finally broke its silence on the crisis at Evergrande , saying risks to the financial system stemming from the developer’s struggles are “controllable” and unlikely to spread.
Speaking at a news briefing on Friday, PBOC official Zou Lan - head of the financial market department. - said that authorities and local governments are resolving the situation based on “market-oriented and rule-of-law principles” Bloomberg reported. Additionally, the central bank has asked lenders to keep credit to the real estate sector “stable and orderly,” said Zou.
“In recent years, the company failed to manage its business well and to operate prudently amid changing market conditions,” Zou said of Evergrande, which has more than $300 billion of liabilities. “Instead it blindly expanded and diversified.” The rhetoric was reminiscent of China's commentary preceding the demise of HNA and Anbang, which subsequently failed.
On one hand China's admission that something is happening in the property sector was a welcome change from the persistent radiosilence until now; on the other, the jawboning is unlikely to ease fears amid investors who are clamoring for more PBOC easing which however is looking unlikely at a time when China's PPI has hit multi-decade highs amid soaring commodity inflation. Furthermore, concerns are growing that the cash crunch at Evergrande is spilling over to other developers, sending a shockwave among China's property sector - which accounts for roughly 70% of local household wealth and directly impacts about 30% of China's GDP. Contagion fears intensified over the past two weeks after a surprise default by Fantasia Holdings Group Co. and a warning from Sinic Holdings Group Co. that its default was imminent.
The central bank is urging property firms and their shareholders to fulfill their debt obligations, Zou said. A slump in developers’ offshore dollar bonds is a natural market response to defaults, he added.
Some other comments from the central banker:
- China’s government has insisted that property not be used as a short-term stimulus for the economy
- Cities have seen an excessive surge in property prices, which mortgage restrictions helped to curtail
- Property investment has slumped recently after some developers faced credit problems, but this is a normal market phenomenon
- Some banks have misunderstood macroprudential policies regarding the property sector
In an actual tangible change, overnight Bloomberg also reported overnight that financial regulators told some major banks to accelerate approval of mortgages in the last quarter. Lenders were also permitted to apply to sell securities backed by residential mortgages to free up loan quotas, easing a ban imposed early this year, according to people familiar with the matter.
Regulators will ensure financial support is provided so that Evergrande’s property projects may resume, Zou said. The developer’s rapid expansion “led to severe worsening of its financial metrics, and risks blew up in the end,” he said.
It remains to be seen if this attempt to restore faith in China's flagging property sector will succeed.