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HONG KONG, Jan 20 (Reuters Breakingviews) – China’s tough stance on property sector deleveraging is easing, but reluctantly. The government will allow property developers to access much-needed funds through frozen prepayments, backed by surprise interest rate cuts. It’s a partial and imperfect solution, but the options are running out.
The decisions represent an attempt to stabilize a faltering sector that contributes up to a third of gross domestic output. Beijing’s crackdown on leverage using its so-called three red lines has led to a series of defaults, and the construction sector has now contracted for two straight quarters, putting it officially in recession, according to an analysis by Gavekal Dragonomics. Accompanied by new Covid-19 closures, it jeopardizes the country’s economic recovery.
Some expected cash-rich state-owned entities such as China Resources Land to cushion the fall by acquiring assets and helping complete paused and pre-sold projects. However, such rescues did not materialize. Real estate mergers and acquisitions contracted 75% in 2021, according to state media.
In early January, Beijing tried to rekindle enthusiasm by exempting credits used for troubled acquisitions from regulatory debt caps, but the deals can do little. An analysis by Refinitiv suggests that 3 billion square meters of projects were on pause in June.
Faced with this daunting reality, regulators are extending a lifeline by unfreezing down payments read more , Reuters reported. That could free up 3.6 trillion yuan ($570 billion) to complete projects and pay suppliers, Breakingviews estimates. Local regulators may resist, fearing companies will use the funds to meet obligations in other jurisdictions, but it will ease liquidity problems among healthier developers including Shanghai-based Shimao (0813.HK) , which declared 22 billion yuan in escrow in June.
Another sign of support came from the central bank, which on Thursday slightly lowered the benchmark five-year loan prime rate used to set mortgages for the first time in nearly two years. The People’s Bank of China generally fears that easier money will fuel speculation instead of growth.
The combination of stages sparked a relief rally. Shares of Shimao jumped 22% this week, and even Evergrande (3333.HK) gained. Beijing’s ultimate goal, however, is to defend true economic stability, not rescue bond traders. If these latest moves don’t put a floor under slippery growth, it may be forced to pull back on its three red lines.
(The authors are Reuters Breakingviews columnists. The opinions expressed are their own.)
– On January 20, China cut its benchmark lending rates for business and household loans for a second consecutive month, while lowering a benchmark mortgage rate for the first time in nearly two years.
– The one-year loan prime rate was cut by 10 basis points from 3.8% to 3.7%, and the five-year LPR was reduced to 4.6% from 4.65 %. The five-year LPR reduction was the first reduction since April 2020.
– The country is also developing nationwide rules to make it easier for property developers to access funds from sales still held in escrow accounts to ease a severe cash crisis in the sector, Reuters reported on January 19, citing unnamed sources.
– In addition, China is making it easier for state-backed property developers to buy assets from indebted private peers by not requiring such loans to be considered debt under rules that limit borrowing, reported Reuters on January 7, citing a source with direct knowledge of the plan.
Editing by Jeffrey Goldfarb and Katrina Hamlin
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