Will China’s spreading property crisis spread to banks and financial institutions?
Falling home prices have in recent months disrupted Chinese property developers’ plans to sell their units, repay bank loans and purchase lands. Real estate firms’ huge losses and declining stock prices have alarmed investors far and wide.
Zhongzhi Enterprise Group, one of the largest private wealth managers in China, which invested heavily in the property sector, hired KPMG in late July to review its balance sheet amid a worsening cash crunch, Bloomberg reported on Thursday, citing people familiar with the situation.
They were quoted as saying debt restructuring process will be lengthy while Zhongzhi has already suspended payments on nearly all its products.
At the same time, global hedge funds have dumped Chinese stocks, mainly property ones, in the first two weeks of this month as they were bearish about the outlook of China’s property markets, Reuters reported.
Some economists called on the government to launch more measures to boost property markets to prevent the spread of property market woes to the financial system.
More measures needed
In the first four months of this year, after China ended its zero-Covid policy, property prices rose.
Since May, however, home prices have started to fall as many homebuyers refused to enter the markets, particularly as local debt problems in Yunnan, Guizhou and Guangxi provinces grew.
Property developers also offered big discounts to homebuyers as they faced rising pressure to repay their debts.
Of the 70 largest Chinese cities, 44 recorded year-on-year declines in new home prices in July, according to the National Bureau of Statistics (NBS). In June, new home prices fell in 42 out of the 70 cities.
Last month, new home prices still grew 1% year-on-year in first-tier cities and 0.2% in second-tier cities but they fell 0.3% in third-tier cities. Existing home prices decreased 0.8%, 0.5% and 0.4% year-on-year, in first-, second- and third-tier cities, respectively.
Although official data did not show an obvious market slump, media reports said existing home prices in some prime sites in top-tier cities have actually declined by 15% from two years ago while prices in tier-two and tier-three cities have dropped by 25-50%.
“To reflect the real market conditions, existing home prices are more effective than new home prices,” said Xu Xiaole, chief market analyst of Shell Research Institute. “Existing home prices fell month-on-month in all three tiers of Chinese cities in July while the decline in the first- and second-tier cities accelerated.”
Zhang Bo, president of 58 Anjuke Research Institute, said some governments in second-tier cities have lowered down payment requirements for second-home buyers but the policy’s effect was insignificant in some cities. Zhang said a lot more supportive measures should be launched in third-tier cities as those unveiled to date have failed to have an impact.
Over the past two months, several incidents have shown that China’s property crisis is spilling over to the banking and investment sectors.
On July 4, Bloomberg reported that state banks had in recent months been offering local government financing vehicles (LGFVs) loans with a maturity period of 25 years, instead of the normal 10 years. The move will hurt large Chinese banks’ margins over the long run.
Since then, the Industrial and Commercial Bank of China (ICBC) and the Agricultural Bank of China’s shares have fallen by 18.4% and 17.4% respectively. The Bank of China’s stocks have lost 16.1% while the China Construction Bank has declined 19.4% over the same period.
On August 6, Country Garden, once the largest Chinese property developer by contracted sales, failed to pay interest on two bonds worth a total of US$22.5 million. On August 13, Sino-Ocean Group, a state-owned property developer, failed to pay interest of $20.9 million on its $700 million notes.
Also in August, Zhongrong International Trust, a 36-year-old wealth management firm in China, could not give money back to its clients. Its second-largest shareholder Zhongzhi is now under debt restructuring.
Some economists and analysts said the only way to avoid financial contagion is to boost property prices and improve homebuyer confidence.
Zhou Shaojie, a professor in the School of Public Policy and Management at Tsinghua University, and Zhang Yibing, an analyst at CSCI Pengyuan, co-wrote an article with the title “Stabilizing property markets also means stabilizing fiscal income and financial sectors,” which was published on August 16.
“The real estate markets remain the biggest issue that slows economic growth and involves relatively high risks,” Zhou writes. “Many local governments have eased their property curbs but the strength is still not enough, especially those in the top-tier cities.”
“The current society has seen many new risks, such as defaults of LGFV loans and falling fiscal income, which are all property problems,” Zhang says in the article. “Real estate is closely related to not only investment, consumption and employment but also local governments’ land revenue and hidden debt problems.”
He says there is room for more cuts in mortgage rates while the People’s Bank of China (PBoC) should allow banks to provide more loans to property developers and homebuyers.
Cailian Press, a Chinese financial website, reported on August 14 that the Guangdong government recently held a high-level meeting with heads of state-owned enterprises and central government-owned firms and senior executives of property developers to discuss how to cope with the growing property crisis.
On August 17, the PBoC said in its second-quarter monetary report that it would fine-tune its lending policies to “adapt to the situation that the supply and demand relations in the property markets have seen major changes.”
It said it will extend its current subsidy scheme until May 2024 to provide property developers with resources to complete their projects and deliver homes to buyers.
It said it will support asset management firms to acquire and revitalize the unfinished projects from some debt-laden property developers.
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