Xi restructures China’s property market, paves way for state dominance

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For any government, updating a private housing sector across the country would be dangerous under terrible conditions. Chinese President Xi Jinping is working on this as the economy recovers, omicron threatens its zero-Covid policy and relations with the rest of the world gradually become strained. As this dangerous combination increasingly weighs on China’s monetary trading sectors, one question continues to arise: what is Xi’s final plan?

In short, the days of skyrocketing house prices and debt-fueled building sprees by billionaire real estate moguls are about to fade. They will be replaced by a much quieter market where authorities are quick to quell speculative frenzies and where development is dominated by state-owned companies that earn similar returns to utilities.

Given the opacity of the Communist Party and its history of backtracking on property reforms, the answer is impossible to know for sure. But China watchers have begun to sketch out a likely future for the property market that looks quite different from its more than two decades of boosting economic growth, household wealth and government revenue.

“While we call the last decade a golden age for the real estate sector, it is now trapped in the age of rust,” said Li Kai, Beijing-based founding partner of bond fund Shengao Investment, which specializes in troubled debts.

Xi’s challenge is to pull off the transformation without triggering a crisis on the eve of a widely expected leadership conference to cement his rule for life.

This transition promises to be particularly painful for private developers like China Evergrande Group, which have already burdened international equity and credit investors with billions of dollars in losses. At the same time, it could go a long way toward achieving two of Xi’s most prized goals: a more stable Chinese financial system and a narrower gap between the country’s rich and poor.

With few analysts predicting an impending financial meltdown, real estate market risks are growing. The weakest real estate companies are under immense stress, hit by a double whammy of extremely high borrowing costs and plummeting sales. Lower-rated developers, including Evergrande, are already defaulting on dollar debt at record rates and the contagion is spreading to stronger companies. Shares and bonds of Country Garden Holdings Co., China’s biggest developer by sales, sank on Thursday following a report that it was struggling to find demand for a new convertible bond.

There are many reasons why China needs to reshape its real estate market. The sector is riddled with speculative buying and is overleveraged, posing a risk to the financial system in the event of a downturn. The price of housing is a burden for already shrinking Chinese families. The average cost of buying an apartment in Shenzhen was about 44 times the average annual salary of local residents in 2020. This worsens inequality as wealthy landlords hoard properties. Millions of houses are empty and some construction projects harm the environment.

The industry has an outsize impact on the economy. When related sectors such as construction and real estate services are included, real estate accounts for more than a quarter of China’s economic output, according to some estimates. Over 70% of urban China’s wealth is stored in housing. “The real estate market is a symptom of underlying problems in the Chinese economy,” said Craig Botham, chief China economist at Pantheon Macroeconomics. “For decades, it’s been the simple, go-to solution for generating revenue for local communities, driving economic growth and providing households with a place to put their money and watch it grow.”

The solution, as is increasingly the case in Xi’s China, is tighter state control. In Guangdong — home to Evergrande — local officials are facilitating meetings between struggling developers and state-owned companies, according to a report by Cailian. Borrowings from major real estate companies used to finance mergers and acquisitions will not be counted in the measures that limit debt, people familiar with the matter told Bloomberg last week.

“The government wants to encourage consolidation in the housing sector – larger and often state-owned developers are likely to take over from weaker players,” said Gabriel Wildau, senior vice president of the global consultancy. to Teneo companies. “They want to break the economy’s dependence on property.” Chinese authorities have targeted excesses in the real estate market before, but the sector’s importance to the economy meant those efforts waned when growth targets came under threat. Beijing is seeking to reduce dependence on real estate by boosting investment in high-tech and clean energy industries – part of Xi’s plans to make growth more sustainable and higher quality. Yet such a process will take time and patience.

“The transition will be long and painful, and we’re not quite sure whether the top is determined enough to carry out this arduous process,” said Hao Hong, chief strategist at Bocom International Holdings Co. The determination of officials is put to the test. China’s housing slowdown is accelerating, even prompting a warning from the Federal Reserve. In cities across the country, the decline in new home prices has steepened every month since September, when prices fell for the first time in six years. Home sales continue to decline. Monday’s data could show real estate investment grew just 5.2% last year, economists predict, the slowest since 2015.

Chinese developers are resorting to bond swaps, late payments, stock sales and other desperate measures to pay off debt. At least eight of the companies have not paid their dollar obligations since October. That includes Evergrande, whose crisis has trapped lender China Minsheng Banking Corp., the world’s worst-performing banking stock. An index of property stocks fell 34% last year, its worst since the 2008 global financial crisis. Authorities are ready to accept risks to economic growth and financial stability in the countryside, according to Eswar Prasad, who formerly headed the International Monetary Fund. team from China and is now at Cornell University.

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