Pressure Building on China’s Property Sector

The Wall Street Journal’s Tom Orlik emerges from the financial weeds and writes that official government data glosses over a growing mountain of liabilities weighing on China’s publicly listed property developers that, unless sales edge up enough, may threaten the foundation of China’s real estate sector:

Mounting liabilities reflect a variety of factors. In 2010, despite declaring war on house prices, the government was slow to clamp down on credit. By 2011, loans were in short supply but developers allowed other liabilities like supplier invoices to mount. Most recently, lending rebounded in the first quarter of 2012, listed developers borrowed 48 billion yuan, more than twice the figure for all of 2011.

Official data might also understate the banks’ exposure to property. Alongside bona fide developers, state-owned enterprises are sometimes tempted to dabble, either as developers or speculators. Some loans intended for building blast furnaces or shipping fleets actually end up as luxury apartments.

The banks are also exposed through the use of property as collateral. At Bank of China, for example, 39% of loans were secured on property and other immoveable assets at the end of 2011. The risk is that a sharper-than-expected price fall would hit developers’ ability to repay loans at the same time as the a decline in the value of property banks hold as collateral.

Housing sales in major Chinese cities surged over the recent long holiday weekend, prompting some analysts to forecast positive momentum for the sector in the coming months. Still, according to The China Daily, more than 60 percent of China’s mainland-listed property developers reported lower profits or losses in the first quarter as they cut prices to raise cash and reduce bloated inventories amid lackluster demand for their new projects. Foreign-based investment funds have taken advantage of the low prices and the eagerness of Chinese developers to get their hands on cash to service their high debt loads.

While the central government intends to continue its overall tightening policy and extend property taxes to more cities this year, the official Shanghai Securities Journal reported today that certain sector-boosting pilot programmes in Shanghai and Chongqing will also be expanded:

China has introduced a series of measures, including lending curbs, price controls and tax levies to cool its once-red hot property market. Chinese banks lent 242.7 billion yuan (S$47.3 billion) worth of property loans between January and March, down 54 per cent from a year earlier.

However, the government of Shanghai, under pressure to sustain economic growth, is considering measures to encourage property transactions and investment, the Shanghai Securities News reported in a separate article on Thursday.

The report gave no details of the measures, but said they were aimed at meeting the demand of low-income and first-home buyers and will not conflict with the central government’s approach to the property market.

Authorities in Jiangsu province’s Yangzhou, meanwhile, may draw the ire of the central government with a new policy introduced this week which offers incentives to homebuyers who purchase already-finished properties. From The China Daily:

Yangzhou homebuyers who purchase finished homes, commonly known as refined decorated houses, will receive cash rewards that vary in accordance with the size of the residences they buy, according to a government circular posted on the housing authorities’ official website.

A reward worth 0.6 percent of a purchase contract’s price will go to those who buy finished houses that occupy up to 90 square meters. For residences taking up from 90 to 120 square meters, the rewards will be worth 0.5 percent of a contract’s value and, for residences taking up 120 to 144 square meters, will be worth 0.4 percent of the value, according to the circular. The policy will take effect on July 1 and last a year.

It applies only to the price of a residence, not to the cost of any parking lots, garages or maintenance needs that come with it, the circular said.

The policy began to draw controversy after it had been posted on the housing authorities’ website on Tuesday morning. By the afternoon, it had been deleted, only to be posted again in the evening.

Some critics said the policy was local officials’ attempt to stimulate the depressed housing market amid the central government’s policy meant to restrict sales of residential properties.