Advertisement
China property
Opinion
Nicholas Spiro
Nicholas Spiro

The View | Why the loss of confidence in China’s property market is set to persist

  • Beijing has been more resolute in reining in the excesses in the property sector in the face of a sharp slowdown than markets anticipated
  • Expectations of a dramatic reversal are unrealistic. Restrictions will be gradually eased, but the priority of taking the heat out of the market remains unchanged

Reading Time:3 minutes
Why you can trust SCMP
Workers at a construction site of a China Evergrande Group development in Wuhan, on December 22. The developer has more than US$300 billion of debts and is scrambling to raise cash. Photo: Bloomberg
Nicholas Spiro
In financial markets, there are many examples of investors getting ahead of themselves. One of the most conspicuous ones in the past few months is the improvement in sentiment in China’s equity and corporate bond markets in response to signals from Beijing that monetary and fiscal policy will become more accommodative this year.

Since last October, a growing number of leading investment banks and asset managers have turned bullish on Chinese stocks, enticed by cheap valuations and a belief that most of the bad news is already priced in. JPMorgan expects offshore Chinese shares to rise by as much as 32 per cent from current levels by the end of 2022.

Implicit in these optimistic predictions is the view that the downturn in the property market – the largest driver of China’s economy and the acid test of Beijing’s efforts to reduce corporate indebtedness and social inequality – will bottom out as the government takes action to shore up demand and prevent more widespread financial contagion.
Advertisement
Investors have drawn comfort from a series of growth-friendly statements and measures in recent months. The government has leaned on major banks to speed up mortgage approvals and made it easier for creditworthy developers to issue debt onshore.

The moves have reinforced a perception in markets that Beijing has decided its deleveraging campaign has reached its limits and the slowdown in the housing market must be reversed. Yet, while investor sentiment towards the property sector may have stabilised, confidence among homebuyers, developers, creditors and local governments continues to erode.

In a sign of how much the fundamentals of China’s residential real estate market have deteriorated, nearly 30 per cent of the sector’s high-yield bonds – which account for the bulk of Asia’s sub-investment grade corporate debt market – were trading at distressed levels early last month, according to JPMorgan data.

Advertisement
Select Voice
Choose your listening speed
Get through articles 2x faster
1.25x
250 WPM
Slow
Average
Fast
1.25x