China developers: lost property

Nov 24, 2023

China’s repeated attempts to tackle its worsening property crisis resemble firework displays: full of light and sound, quickly extinguished.

Property stock prices have burst upwards with each set of government measures to boost the market, only to collapse shortly thereafter. This week’s rally should not differ.

Shenzhen, one of the most expensive cities in China, offered edicts to lower downpayment ratios and relax other regulations from yesterday, according to state-run media. Beijing is also expected to provide more financial support for struggling developers in coming weeks.

Bargain-hunters have sought out shares of developers. Country Garden, China’s largest private developer, rose a quarter yesterday, bringing gains for the past month to 50 per cent. Peer Sino-Ocean Group’s share price is up 45 per cent.

Countless policy changes over the past two years have done little to encourage a sustained return of buyers, necessary to stabilise property prices. Home sales at China’s 100 top developers fell 28 per cent in October as property investment dropped the most in eight years.

Beijing must then encourage more lending, ensuring that developers have access to liquidity. But even that effort may soon hit its limit. Net interest margins at the largest state-owned lenders fell to a record low at the end of the first half. At 1.74 per cent, that has now fallen below the reference level required by the People’s Bank of China for commercial banks.

In particular, the four biggest banks, Bank of China, Agricultural Bank of China, China Construction Bank and Industrial and Commercial Bank of China, must shoulder the burden of added lending. As a result, loan yields are falling. ICBC, the largest stateowned lender, trades below 0.4 times its tangible book value, a fraction of its regional peers.

For the lending to developers, analysts expect cumulative nonperforming loans to go as high as 15 per cent.

The fallout has spread to China’s shadow banking sector — non-bank financial institutions which lend to higher-risk industries. Zhongzhi, one of the biggest, may have a shortfall of $36bn. It has warned that it is “severely insolvent”. Systemic financial risks are mounting. Risk-averse investors should not chase these property companies.