Broken Homes

These special loans are part of the Chinese government’s financial bailouts for the real estate sector that were rolled out in the second half of 2022, after the Political Bureau of the Communist Party of China (CPC) Central Committee said at its July meeting that “ensuring delivery of housing projects” was a major task. 　

The Tianrunfu development is one of 22 projects Luohe officials listed as priorities for the low-interest government loans to enable stalled projects to be completed, which totaled 920 million yuan (US$132.2m). The development only took 50 days to complete after the cash injection. All 22 projects saw work resume around the same time, reported local newspaper Dahe Daily. 　

The Chinese property sector has been plagued by excessive borrowing for a long time, with some of the country’s biggest developers mired in debt and defaulting on loans and bonds. The pandemic had exacerbated the already slowing market, and construction on many pre-sold projects stopped or developers postponed the date of completion because of financing difficulties, causing anguish for buyers, and affecting market confidence. 　

The central government unveiled a raft of support measures starting in August 2022, announcing special loans totaling 200 billion yuan (US$28.7b) for incomplete housing projects. Local authorities are the borrowers and distribute funds to developers through local financing platforms. Developers repay the loans to local authorities who will refund the central government. More support policies were issued in November covering presale funds, loans and bonds and equity financing to help property companies finish projects and improve liquidity. 　

Compared to previous bailout measures that mainly focused on stimulating demand, this round of policies emphasizes securing housing delivery and improving the overall financial environment of property companies. Market analysts are confident the measures will resolve the housing completion problem and boost wider market confidence. 

This bold collective move sparked a wave of mortgage boycotts across the country. By July 13, 2022, homebuyers of 103 unfinished housing projects from 47 cities and 18 provinces said they would stop paying loans for pre-sold houses, reported news outlet ifeng.com. 　

The mortgage boycott caused bank shares to fall on July 14, 2022, although commercial banks responded that the loan risk remained under control. 　

In China, homebuyers of pre-sold new developments start repaying mortgages when the developer gives them a date to move in, but before the building is finished. If the completion date is late or the project is halted, they have to live longer with their parents or pay more rent while also paying their mortgage. “We have no choice but to stop paying the loans. Otherwise we may end up with nothing,” a homebuyer surnamed Fang told magazine The Time Weekly in July, although she knew it would affect her credit rating. 　

At the other end of the chain are debtstricken property developers who have already defaulted or are at risk of default, after sales started slowing in the latter half of 2021 and traditional financing channels were restricted by the government to cool the market. 　

The real estate sector has been one of the major driving forces of China’s economy for nearly 20 years. Given its close links with other major sectors, particularly finance, manufacturing and construction, the sector is estimated to contribute over 20 percent to China’s economy. But developers largely relied on debt-financed mechanisms to expand. 　

In 2016, China’s real estate sector entered a period featuring high leverage based on high turnover. In this model, developers leverage pre-sale funds to borrow more money to buy more land or start new buildings to realize high capital efficiency. Homebuyers were playing an increasingly important role in the sources of capital for real estate development. But since financing in the sector tightened in 2020 as the country aimed to curb developers’ debts and sales also declined, it became hard to sustain this method of getting cash. The pandemic and high-profile defaults by big developers like Evergrande in 2021 worsened the situation. 　

The large-scale halt in projects eroded homebuyers’ confidence even more, causing a vicious cycle. The total area of all commercial property and housing sold between January and November 2022 decreased by 23.3 percent year-on-year, while sales fell by 26.6 percent year-onyear, according to the National Bureau of Statistics (NBS). 　

On July 14, 2022, the China Banking and Insurance Regulatory Commission (CBIRC) addressed the issue of uncompleted projects, saying it attached great significance to the problem and would guide financial institutions to step in to deal with the risk and encourage regional governments to push housing delivery and protect people’s livelihoods. 　

On July 28, in discussing the present economic situation, the Political Bureau of the CPC Central Committee for the first time mentioned “ensuring the delivery of housing projects” as one of the major tasks in the second half of 2022, reflecting the importance the government attaches to the debt crisis in the property sector. 　

Against a sluggish real estate market, “ensuring the delivery of housing projects is important in protecting the legitimate interest of consumers, preventing the real estate crisis from spilling out to other areas and stabilizing the industrial development and oerall economic growth,” said Lou Feipeng, a researcher with the Postal Savings Bank of China, in an interview with Financial News in November 2022. 

On September 22, 2022, the first of the money arrived in Shenyang, Liaoning Province. By November 2022, cities including Zhengzhou, Luoyang, Kaifeng and Harbin had received the loans. 　

More policy tools arrived in November. On November 13, 2022, the PBoC and the CBIRC issued a 16-step guideline that encouraged commercial banks to provide complementary financial support for the property sector, which includes the timely delivery of housing projects and risk management of companies in difficulty. 　

On November 14, the CBIRC, the Housing Ministry and the PBoC allowed commercial banks, who are supervisors for pre-sale housing funds, to issue letters of guarantee to “high-quality developers,” those judged to be financially sound with strong profitability. These firms can withdraw up to a maximum of 30 percent of pre-sale funds to ease the cash crunch, based on their risk evaluation. But the funds should be used only for project construction and debt repayment, not to purchase more land or other investments, the notice said. 　

These funds are the deposits homebuyers already paid directly to developers which are held in a supervised escrow account. The funds are only supposed to be used for construction, but in some places developers were allowed to withdraw money for other purposes, such as paying workers’ salaries. This is no longer allowed. Since 2021, when the widespread misappropriation of funds was discovered, the proportion of pre-sale funds that real estate companies can withdraw depends on how much of their projects are completed. 　

Chen Wenjing, market research director at China Index Academy, a real estate research institution, calculated that since the start of 2022, over 110 provinces and cities either relaxed or tightened policies on the use of pre-sale funds to cope with the capital liquidity of real estate developers. “The policy’s effect is limited in the short run, as it mainly means to release liquidity for quality developers,” Chen told NewsChina. 　

On November 21, 2022, Pan Gongsheng, vice governor of the PBoC, announced that the bank will provide another 200 billion yuan (US$28.7b) at zero cost to six commercial banks to lend to property developers for housing completion, on top of the special funds issued earlier. 　

The same month, the National Association of Financial Market Institutional Investors (NAFMII), China’s interbank bond market regulator, announced it would support private enterprises, including property developers, to issue more bonds. The central bank will provide low-cost loans and support of about 250 billion yuan (US$35.9b), which can be expanded later, of bond financing by private enterprises, under the operation of professional institutes. Even though the policy does not target real estate companies, NAFMII said it has arranged China Bond Insurance, a State-owned credit enhancement company for bond issuers, to help private property companies improve their credit risk profiles, and this has worked well. 　

Between August and October 2022, China Bond Insurance granted guarantees to six developers to help them issue 6.8 billion yuan (US$977.1m) in bonds, according to data from China Index Academy. After the NAFMII announcement, at least three developers, Longfor Group, Medea Real Estate and Seazen Holdings, were approved to issue bonds worth 50 billion yuan (US$7.2b) in total. 　

Li Yujia, a researcher from the housing policy research center of Guangdong Urban & Rural Planning and Design Institute, noted that defaults by some property developers caused a deterioration in the financing environment for all developers. “Currently, there is irrational and undifferentiated risk expectation for developers that just have small problems or are relatively healthy,” Li told NewsChina, “The second prong [bond issuance guarantee] is a correction for such irrationality,” he said, referring to the government’s three-pronged package of support policies for the real estate market in obtaining credit, bond issuance and fund raising on the stock market. 　

On November 28, the CBIRC announced that listed property companies could again engage in mergers and acquisitions, reorganizations and equity refinancing, ending a 12-year ban. It encouraged non-publicly refinanced funds to be used for completing unfinished projects and ensuring people’s livelihoods. Industrial insiders regard it as a milestone in favorable policymaking for the sector. 　

The next day, shares in dozens of property-related stocks rose to the daily limits. Meanwhile, several property developers, including some leading ones, were quick to raise funds through new share sales. On December 1, 2022, Vanke, a large real estate developer, said its majority shareholder was proposing to issue new shares worth no more than 20 percent of the company’s total share capital. 　

According to Kuang Weida, a professor at the Renmin University of China specializing in real estate research, equity financing allows more financing opportunity for listed real estate-related companies and will help smooth the delivery of housing projects. “Some listed developers can also engage in the merger and reorganization of small- and medium-sized companies to optimize the resource distribution in the market,” Kuang told Beijing Youth Daily in a December interview, predicting a small wave of mergers and acquisitions to come. 　

“With the release of the three-prong approach – supportive financing policies in credit, bonds and equity – and the optimized management of pre-sale funds, the credit risks of property developers and half-built developments are expected to improve significantly,” said Dongxing Securities in an analysis published on December 5, 2022. 

Since the funds were released, some 40 provinces and cities have put forward their own measures for the completion of unfinished projects, according to China Index Academy. 　

There are signs of progress as the yearon-year decline in completed floor space slowed in the first nine months of 2022. Between January and October 2022, completed floor space in China dropped by 18.7 percent year-on-year, 1.2 percent lower than that between January and September, showing a slight increase in the number of buildings completed, according to NBS data. The decline narrowed for three months in a row. 　

Many real estate developers revealed plans to complete projects in August. Evergrande said on September 12 that its chairman Xu Jiayin had ordered that incomplete projects be restarted before September 30, revealing that Evergrande had 706 projects to complete and had already restarted 668. The company restarted construction on some housing projects in October 2021. 

In a video published by Evergrande on December 2, 2022, Xu said the company had delivered 256,000 buildings and is striving to finish another 44,000 in December to achieve its goal of finishing 300,000 in 2022. 　

Evergrande has 27 projects in Guiyang, capital of Southwest China’s Guizhou Province, which have gradually resumed construction and they are trying to deliver as promised, said a project contractor speaking to NewsChina on condition of anonymity. The project is incomplete because suppliers now require payment up front, so they worked on and off based on how much money they had. He hinted that the special funds for housing completion issued in September 2022, from which his project gets 300 million yuan (US$43.1m), were not enough to get the job done. 

Besides, not all semi-built projects are covered. In Shandong Province, there are 60 Evergrande projects, but only 25 got loans that totaled 2.2 billion yuan (US$316m), an official from the provincial housing department told NewsChina. They plan to include more Evergrande projects when they apply for the next batch of loans. 　

As the bailout policies expand from rescuing projects to stabilizing developers, sustainable companies are expected to benefit more. “Usually, financing tools like issuing medium-term notes and granting credits require counter-guarantees and collateral. Developers in debt crisis generally are incapable of that,” Xie Yifeng, director of China Urban Real Estate Institute, told securities magazine Weekly on Stocks in late November 2022. He added that most private companies in debt crisis still have to count on themselves for help. 　

Researcher Li Yujia said that external financing is just one method of addressing the cash shortage. “The most essential channel is via sales, which contributes 50 percent of developers’ capital. It depends on consumer expectations on the property market, when housing prices go down and when the impact from the pandemic eases,” Li said, adding that consumer enthusiasm for buying real estate is likely to be dampened for some time. “It will take a long time for the policies to exert an effect on the full market,” Li said. 　

Despite the gradually recovering financing, market demand remains in a slump. Data from China Index Academy shows that in the first 11 months of 2022, sales of the top 100 property developers in China were only 6.73 trillion yuan (US$967b), a year-on-year drop of 42.1 percent. According to real estate information platform CRIC, in November, the transaction area in 30 major cities decreased by 14 percent, a record low in the second half of 2022. 　

Kuang noted it is essential to boost market confidence, and that buyers, rather than developers, should be the target of support. He suggested that housing policies be more favorable for low- and middle-income earners and that groups with urgent housing demand should be targeted precisely by lowering the down payment ratio, reducing interest rates, increasing tax incentives or providing subsidies. 　

Some cities have already taken action. Statistics released by China Index Academy in November show that over 80 places, including Shijiazhuang in Hebei Province, and Wenzhou in Zhejiang Province, lowered the down payment ratio to 20 percent. Mortgage interest rates and down payment ratios in many cities have reached record lows. On January 5, 2023, the PBoC announced that local governments can maintain, reduce or remove the minimum mortgage interest rates when local housing prices go down. 　

Looking forward to 2023, China Index Academy forecast in its report that policies will be further optimized, the reasonable financing demand of developers will continue to be supported, housing delivery will remain the focus and more substantial progress is expected, which will improve homebuyers’ expectations.