Beijing Signals More Stimulus For Slumping Property Market, But It's Just Not Enough

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by Tyler Durden
Tuesday, Jul 11, 2023 - 02:45 PM

In what has become a daily tradition of evergreen headlines, overnight Bloomberg reported that China, whose economy is not only creaking with youth unemployment at all time highs...

... but is also on the verge of deflation and in desperate need of much more stimulus ...

... signaled - what else - that more economic support measures are "imminent" after authorities took a yet another small, and largely meaningless, step toward supporting the ailing property market by extending loan relief for developers.

According to Bloomberg, top state-run financial newspapers ran reports on Tuesday flagging the likely adoption of more property supportive policies, along with measures to boost business confidence. The problem, as we discussed one month ago, is that we now get at least one China stimulus headline every day in lieu of actual stimulus, and what stimulus actually does finally emerge is much less than the bazooka China needs to kickstart its economy.

China Securities Journal, the country’s flagship securities newspaper, said Tuesday that China is expected to “accelerate” policy roll-out in order to promote the stable and healthy development of its real estate market. In a separate report, it also said the government may introduce measures to boost business confidence among private, state-owned and foreign firms following officials’ recent meetings with company executives.

Meanwhile, Shanghai Securities News cited Wang Qing, chief macro analyst at Golden Credit Rating, as saying that policymakers may take further measures such as relaxing property purchase and mortgage rules as well as cutting home loan rates to achieve a soft landing of the real estate market.

Earlier, and in keeping with the recent torrent of speculation of "imminent but not really" stimmies, financial regulators stepped up pressure on banks to ease terms for property companies by encouraging negotiations to extend outstanding loans. The People’s Bank of China and National Financial Regulatory Administration said in a joint statement Monday that the aim is to ensure the delivery of homes that are under construction.

Some outstanding loans, including trust loans due by the end of 2024, will be given a one-year repayment extension, it said. Previously, the more-generous loan terms were to be applied only for loans that were due by late May 2023, as part of a 16-point plan unveiled late last year.

“The move signals that regulators consider it’ll take a year and a half more for developers to see their fundraising and operations normalize,” said Liu Shui, a research director at China Index Holdings Ltd. “It means the housing market downturn and developer risks have been worse than they expected earlier" which of course, is typical for China. What is also typical is that Beijing knows very well that only a lot of new debt can fix - at least temporarily - the problem, at least until another massive debt-funded fiscal stimulus push is required. Eventually no more debt is possible, but that's a problem not just China is facing - so is the entire fiat system. And at this point those who manage to shove the problems under the rug for as long as possible, win/

Loans due by the end of 2024 account for about 30% to 40% of developers’ total debts, according to Raymond Cheng, head of China and Hong Kong research at CGS-CIMB Securities, adding the measures may help ease developers’ liquidity in the short term if implemented.

As Bloomberg notes, China’s real estate crisis is stifling a recovery in the world’s second-largest economy, fueling expectations for the government to take more steps to revive demand. Home sales resumed declines in June following a brief rebound earlier this year, adding to pressure on debt-laden developers and appetite for resources such as iron ore.

To revive the market, regulators have long been expected to come up with more supportive policies, but so far all we get every single day is just reports, rumors, innuendo and other hearsay... and very little in terms of action. People familiar with the matter said in June that China is considering a new basket of measures, such as reducing down payments in some non-core neighborhoods of major cities, lowering agent commissions on transactions, and further relaxing restrictions for residential purchases. That too has yet to materialize.

The latest "stimmy rumor" did the trick of briefly propping up risk assets: a Bloomberg gauge of Chinese property shares rose 1% on Tuesday afternoon, paring this year’s decline to 26%. Iron ore futures in Singapore rose as much as 2.5%. Chinese high-yield dollar bonds, dominated by developers’ notes, were little changed in the morning, according to credit traders.

Unfortunately for Beijing, stabilizing the real estate market, which according to Goldman is the world's largest asset class...

.... is just the start: besides property, other facets of the economy are also showing weakness. Consumer spending is sluggish, exports are flagging and local government debt is soaring. As we showed yesterday, the nation’s CPI was flat in June while factory-gate prices fell further, deepening deflation concerns and adding to evidence that the recovery is weakening.

“Today’s easing, which focuses on developer financing, is far from enough to stabilize the sector,” Larry Hu, head of China economics at Macquarie Group Ltd., wrote in a note to clients. “After all, credit risk for banks would remain elevated if the housing market stays weak.”

Still, the move may signal that more property steps are coming, he added. “Looking ahead, we expect to see more easing on the demand side, such as lowering the down-payment ratio and easing purchase restrictions,” Hu said.

At the end of the day, however, a Mario Draghi-like "bazooka" will be needed. 

Such loosening may continue to be limited to smaller prefectures, such as in certain districts instead of in a city as a whole, said Ethan Wang, chief investment strategist at Standard Chartered Bank’s China wealth management business.

A “bazooka” package that can quickly turn the property sector around isn’t likely, said Nomura Holdings Inc.’s chief China economist Lu Ting.

And in an ominous repeat of events from late 2021 when China's property market imploded amid the cascade of property developer defaults starting with Evergrande, the renewed concerns about the property sector have increased pressure in China’s credit market. Declines in high-yield dollar bonds accelerated this month amid debt worries involving major builders Sino-Ocean Group Holding and Country Garden Holdings. Meanwhile, two smaller peers in late June failed to make bond payments.

Meanwhile, leading builder China Vanke said the nation’s home market is “worse than expected,” while Goldman Sachs Group Inc. now projects a higher default rate for Chinese high-yield property dollar bonds.

“As long as physical property has lost its investment appeal as an asset class, it will be difficult for homebuyer confidence to reverse and sales to pick up,” Bloomberg Intelligence credit analysts Andrew Chan and Daniel Fan wrote in a note on July 5. “Some surviving Chinese developers’ may choose to default or restructure rather than attempt to resolve their debt problems.”

Meanwhile, nothing changes and the latest credit data confirmed that China's economy is doomed to muddling along on a downward glideslope until something breaks. The silver lining: the latest credit data was at least a bit better than expected as RMB loan, TSF and M2 data in June all came in above expectations after the disappointing credit data in April and May. Here are the details:

  • New CNY loans: RMB 3.05tn in June beating consensus: RMB 2.25tn; Outstanding CNY loan growth: 11.3% yoy in June ; May: 11.4% yoy (+7.8% mom sa ann).
  • Total social financing: RMB 4.22 tn in June, beating consensus: RMB3.0tn; TSF stock growth: 9.0% yoy in June, vs. 9.5% in May. The implied month-on-month growth of TSF stock: 7.3% in June vs. 7.1% in May.
  • M2: 11.3% yoy in June beating consensus: 11.2% yoy; but down from May: 11.6% yoy

RMB loan month-over-month annualized growth was 12.7% in June, higher than 7.8% in May. The composition of loan data suggests broad improvement and stronger credit demand - household loan growth accelerated slightly to 7.7% month-over-month annualized from 7.2% in May, and corporate medium to long term loans grew 20.3% month-over-month annualized in June, vs 14.7% in May.

Overall total social financing month-over-month annualized growth was 7.3%, marginally higher than 7.1% in May, mainly on stronger RMB loans. Stronger - if still modest at best - policy support likely contributed to the higher loan and credit growth towards quarter-end. PBOC vowed to intensify countercyclical adjustment and cut policy interest rates in the middle of June. The combination of a large decline in fiscal deposits and higher government bond net issuance also pointed to faster fiscal expenditures in June.