China’s central bank head dissuades real estate woes as Vanke teeters towards default

The head of China’s central bank has said the country’s property market has shown ‘positive signals’ despite uncertainty the worst has passed
Vanke, a major developer, saw its credit rating demoted as other firms tangle with solvency questions

China property

Sylvia Ma

Published: 6:00pm, 26 Mar 2024

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The governor of China’s central bank talked up the country’s property market and the resilience of its financial system on Monday, as the debt pressures weighing on a leading developer have spawned more worries the crisis in the sector has yet to reach its conclusion.

At a closed-door meeting with representatives of domestic and overseas financial institutions, Pan Gongsheng said real estate – long a bellwether for the economy at large – has shown “positive signals”.

“It has a solid foundation for long-term healthy and stable development,” he said during the China Development Forum, which drew dozens of executives from major multinationals including tech giant Apple.

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“Property market volatility has a limited impact on China’s financial system,” he added, according to a statement posted on the website of the People’s Bank of China (PBOC).

His comments came as China Vanke battles rumours of default, with credit rating agencies Moody’s and Fitch demoting the company’s status to below investment grade.

The downgrade further darkened the shadow looming over the sector, initially precipitated by revelations of financial trouble for China Evergrande, Country Garden and many other developers.

Real estate, once a pillar industry contributing around a quarter to national economic output, has grappled with a liquidity crisis since 2021, when Beijing’s “three red lines” policy restricted borrowing in the highly leveraged field.

Several barriers to financing have been removed since last year, with a whitelist initiative launched in January to encourage municipal governments and banks to work together in providing credit for covered projects.

However, data show the housing market slump has largely continued unabated.

Property investment dropped by 9 per cent year on year in the first two months of 2024 and new home sale values plunged by 29 per cent compared with the year prior, according to the National Bureau of Statistics.

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“The weakness from the property sector has persisted. In order for Beijing to reach its GDP growth target for this year, more easing is needed and likely to be implemented in a coordinated way,” HSBC said in a research note earlier this month.

The bank called for “a stronger push to stabilise the property sector, essentially using a holistic method to push forward the dual track model and reverse the current track of a continuous deterioration in the new home market segment.”

China has set an ambitious target to grow its economy by around 5 per cent this year, a challenging goal to meet as other factors complicate the country’s situation in addition to the trepidations of the property market.

S&P Global Ratings on Monday announced it would maintain its economic growth estimate of 4.6 per cent for China in 2024, compared with last year’s actual rise of 5.2 per cent.

“Our forecast factors in continued property weakness and modest macro policy support. Deflation remains a risk if consumption stays weak and the government responds by further stimulating manufacturing investment,” the rating agency said.

The PBOC governor, however, expressed more optimism, saying he believes the country still has “ample policy space and a rich reserve of tools”.

China’s financial system is operating soundly, with generally healthy institutions

Pan Gongsheng

“China’s economy [is on] an upward trend and is capable of achieving the expected growth target,” said Pan at Monday’s meeting. “We’ll continue to provide a favourable monetary environment for economic recovery.”

Pan also addressed concerns about ballooning debts that have burdened the balance sheets of local governments and undermined confidence in the private sector.

“The debt level of the Chinese government is in the lower mid-range internationally, and policies to address local government debt risk are gradually proving effective,” he said.

“China’s financial system is operating soundly, with generally healthy institutions and strong risk resistance capacity.”