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Why Chinese investors are searching “abroad”

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Real estate Crisis in China

China has two types of dangerous borrowers. While the first type has assets that look good, it is not clear how much debt they have hidden. Think Evergrande. They have the political connections to help the second type bail out the first. However, they are in huge debt and don’t have any assets to pay it off.

China’s outlook for property could improve over the coming months, but there are two things that must occur in order for the sector to recover, an analyst told CNN.

Logan Wright, director, China markets research at Rhodium Group, stated that stabilizing property sales and allowing more access to Chinese funds could help boost the real estate industry in China. source

Wright stated that conditions are emerging for a more positive outlook for China’s property sector, the economy in general, and implications for risk assets. Wright spoke to CNBC’s ” street signs Asia.”

Wright noted that developers will be under increasing financial pressure if property sales continue to decline. He added that it’s not something Beijing could offset with its own policies, as property sales are worth trillions of dollars in China’s economy.

China’s Policy to stabilize the real estate economy

Wrigh stated that lower interest rates would stabilize China’s bank lending growth and reduce borrowing costs for the real economy.

China decided to relax its purse strings and inject money into the economy to help ward off any threats to its recovery.

The People’s Bank of China announced Monday that it will reduce the reserve requirement ratio of most banks by half a point starting December 15. This move will reduce the amount of money banks must keep in reserve and unleash 1.2 trillion Yuan ($188 billion) to finance household and business loans.
This decision, the second to this ratio cut this year, came at the same time that China’s Politburo indicated that it might take more aggressive measures to protect its economy in 2022. In a statement, the Chinese Communist Party’s leadership team was led by President Xi Jinping and stated that “ensuring stability” would become a priority for the next year.

Real estate agent offer house represented by model.

China may relax rules that allow distressed real-estate developers to sell assets in order to prevent defaults. This will help the economy. The “three red lines” regarding leverage ratios, which were established in August 2020, were so strict that there weren’t any buyers for developers property holdings, even though Evergrande was willing to sell projects at fire-sale price. In the future, regulators may allow white-knight developers to take over assets, without having projects’ debt impact their own leverage ratios or risk crossing the red lines. This would be a great relief. But who will take the bait? The dangers lurking beneath might make even the most successful real estate magnates reconsider their decision.

Hidden debt is easy to find in the high-speed, high-leverage construction industry of China. Developers often borrow money from trust companies to buy land. They ask their employees and senior managers to purchase trust products in order to secure deals.

Developers are unlikely to be able to obtain enough bank loans to pay for construction costs even after purchasing land. The regulatory limit of 40% is dangerously close to the threshold for big lenders. Developers start owing money to their suppliers, often in commercial paper. Pre-sales are also done, where consumers must pay full price for a home before it is ready to be taken.

Chinese Real estate Developers end up borrowing from everyone.

Many creditors have claims on a project that a new corporate buyer is looking for. Sometimes the financing can be so complicated that even the seller doesn’t know how much it owes. Corporate rescuers can work with distressed developers to develop projects together. They then need to assume all liabilities. After the projects are completed, the developers can sell all apartments and repay their debt. So goes the idea.

This doesn’t work in practice. White knights are unable to disentangle themselves when sellers fail.

In January 2020, Shimao Group Holdings Ltd (China’s 10th largest builder) came to the rescue Fujian Fusheng Group by promising a joint venture for its development. This came at a high cost. As the sell-offs spread towards the more well-known names, traders dumped Shimao’s bonds this month, worried that it could be on the hook for Fusheng’s private debt. Shimao’s investment-grade S&P rating was revoked last week. A white knight would need to be extra cautious in such an environment. A bad move could mean that the saviour must be saved.

Traders dream of white knights from the state riding to their rescue. Are they big enough to save private counterparts? China’s top ten builders are mostly privately owned enterprises. The government has not been eager to save its own companies. As far back as 2015, Beijing allowed state-owned companies to default. Even state-owned enterprises need to be careful with their finances.

In the last few months, financial distress among Chinese real-estate firms emerged as China Evergrande Group and other developers — Kaisa, Sinic Holdings — tried to repay their debt.

Rating agency Fitch downgraded Evergrande & Kaisa to “restricteddefault” on Thursday after they missed their bond repayment deadlines.

Fitch rates an issuer in restricted default after it defaults on a payment but has not initiated any proceedings to wind up the company, such as filing for bankruptcy.

Property sector facing difficulties

Any additional governement actions would follow the decision by the People’s Bank of China to cut the amount of cash that banks must hold as reserves. The central bank’s move would release 1.2 trillion yuan ($188 billion) into the economy to prop up growth. source

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