You wouldn’t know it from the reaction in the iron ore market but the Chinese stimulus is still small and targeted. At the FT:
Chinese regulators have eased pressure on property developers by loosening credit controls and allowing more bond issuance in recent weeks in an effort to prevent the sector from collapsing. But analysts and government advisers say the measures do not represent a retreat from President Xi Jinping’s crackdown on the sector.
…“There are still systemic risks posed by a real estate meltdown to the broader economy,” said Deng Haozhi, a Guangzhou-based property analyst. “It is up to regulators to avoid that scenario.”
There are 1948 words left in this subscriber-only article.
A Beijing-based policy adviser said: “All of our previous attempts to regulate the real estate market have failed because we exited halfway through overhauls. This time the central government is determined to stick to the plan.”
Mortgage lending increased 1 per cent in October, ending four consecutive months of year-on-year declines, according to Wind data, after Zou Lan, head of financial markets at the People’s Bank of China, said some banks had misinterpreted Beijing’s real estate policies.
The objective, Zou said, was to restrict the flow of credit to overleveraged property companies rather than to stop the issuance of development loans. “We have instructed major banks to keep real estate loan issuance steady and orderly,” he added.
…Loan officers say they are reluctant to help overleveraged property developers, especially after the number of residential transactions fell almost a quarter by dollar value in October compared with the same month last year.
“We don’t expect housing transactions to recover quickly because property buyers expect prices to weaken further,” said the CMB loan officer. “That could undermine developers’ ability to generate cash flow to pay off debt.”
New home prices declined in both September and October, and buyers are also worried about the government’s recent efforts to roll out a property tax in some cities. “Homebuyers are standing by until they are clear about how much the tax will affect them,” the loan officer said.
Property sales are still down about a quarter in November:
Given the expanding number of discounts, firesales and giveaways it’s not easy to estimate underlying demand but it is still clearly weak.
The most leveraged developers are still in all sorts as well:
China high-yield dollar notes dropped 1 to 2 cents, credit traders said, and Aoyuan’s 2022 and 2023 bonds both slumped, Bloomberg-compiled prices show. The property company missed payment on 66 million yuan ($10.3 million) of a 78 million yuan trust loan on Nov. 12, REDD reported, citing a source familiar with the matter and a notice seen by the research firm.
But infrastructure issuance has accelerated finally:
Chinese local governments issued 644.1 billion yuan special-purpose bonds in October, the highest monthly level this year, according to data released by the Ministry of Finance on Tuesday.
They issued a total of 876.1 billion yuan of bonds last month, which also included 232. billion yuan of general-purpose bonds, showed the data. In terms of purposes, the bonds included 614.5 billion yuan of new bonds and 261.6 billion yuan of refinancing bonds.
Special-purpose bonds are designated for investment in infrastructure and public welfare projects which are commercially viable. They must be repaid with income generated from the projects, compared with general-purpose bonds, which are paid back with local governments’ fiscal revenue.
Chinese local governments’ monthly bond issuance, including general-purpose bonds (green bar) and special-purpose bonds (red bar), according to the Ministry of Finance.
For the first ten months, local governments issued a total of 6.49 trillion yuan of bonds, including 2.47 trillion yuan of general-purpose bonds and 4.02 trillion yuan of special-purpose bonds, showed the data. By purposes, that included 3.66 trillion yuan of new bonds and 2.83 trillion yuan of refinancing bonds
Separate data from Wind Information showed that Chinese local governments have issued a total of 6.75 trillion yuan of bonds this year as of November 21, marking a new record high, rising 4.8% from the same period last year and surpassing full-year amount in 2020.
Considering that more than 700 billion yuan quota for local government special-purpose bonds this year is still unused, full-year local government bond issuance in 2021 will likely exceed 7 trillion yuan.
Notably, local government bond issuance last year was mainly driven by a surge in special-purpose bonds which are meant to fund infrastructure projects and other public-purpose projects, as the government stepped up support to the economy hit hard by the Covid-19 pandemic, but this year the growth was mainly driven by refinancing bonds.
The 6.75 trillion yuan of local governments bonds issued this year included 3.84 trillion yuan of new bonds, decreasing 15% from the same period last year, while refinancing bonds reached 2.9 trillion yuan, surging 53% from a year ago.
Analysts say that the surge in refinancing bonds came as a large amount of local governments bonds matured this year and also due to issuance of a large amount of some “special refinancing bonds”.
In previous years, local governments were required to disclose which specific maturing bonds would be repaid when they issued refinancing bonds, but this year, local governments issued more than 600 billion yuan of “special refinancing bonds”, which are used to repay existing debt but issuers are not required to disclose which specific bonds are repaid.
For instance, on September 13, Guizhou provincial government issued 3.3 billion yuan of the special refinancing bonds, proceeds of which were used to “dissolve hidden debt risks in county-level governments.”
South China’s Guangdong province issued a combined 96 billion yuan of the special refinancing bonds in October and November, as part of a pilot to reduce the province’s hidden debt risks.
Other regions such as Shanghai, Beijing, Henan province, Jiangsu province, Hebei province and Yunan province may follow suit and issue this type of refinancing bonds to replace maturing hidden debts, said Yang Yewei, chief fixed-income analyst at Guosheng Securities.
In terms of new local government bonds, this year’s issuance was significantly slower than previous years. According to data from Wind Information, they issued about 1 trillion yuan of special-purpose bonds in the first half of the year (excluding special-purpose bonds issued to help small banks replenish capital), which accounted for 27.4% of full-year quota, sharply lower than 61% a year earlier.
The much slower pace was mainly because the pressure for the government to boost economic growth is smaller and therefore the central government granted new special-purpose bond quota to local governments much later than usual, said analysts.
In addition, as aggressive special-purpose bond issuance in the past two years left a large amount of funds idle, authorities are getting stricter in reviewing projects this year, they say.
The main reason for booming debt and refinancing is collapsing revenue from land sales. I still see infrastructure materially lower in 2022 as well for this reason.
There is not enough stimulus here to turn falling steel output with any force.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
