It looks like we may have found a bottom in the Chinese property bust. Exhibit A is sales have stopped falling:
However, Exhibit B, developer spreads, tells us why there is little to cheer about. I can’t see much of a rebound coming. It is a structural drop as developers are shaken out.
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Nor is there any more detail on the “bailout fund”. But other, less friendly, are surfacing:
According to Bloomberg, China is considering a plan to seize undeveloped land from distressed real estate companies, using it to help finance the completion of stalled housing projects that have sparked mortgage boycotts across the country.
The proposal would take advantage of Chinese laws allowing local governments to wrest back control of land sold to real estate companies if it remains undeveloped after two years, without compensation. That would give authorities more leeway to direct funds toward uncompleted homes, potentially to the detriment of creditors who would lose claims on some of developers’ most valuable assets.
According to Bloomberg sources, in a typical scenario the government would seize land from a distressed developer and give it to a healthier rival, which would in turn provide funding to complete the distressed developer’s stalled projects. The government could also rezone the seized land in some cases to increase its value, the people added, asking not to be named discussing private information.
That won’t improve spreads or lift wider property confidence while it transpires.
There is not much encouragement for the wider Chinese rebound, either. Infrastructure bonds have been issued:
But cement is not giving a positive signal:
Coal and cars are better:
But mobility remains soft:
And COVID remains the perpetual headwind:
Chinese banks are battening down the hatches as zombification marches on:
Chian is not going to save anybody. Pantheon:
China signals modest stimulus at best for H2
China’s Politburo met on Thursday, and dashed the hopes of any remaining stimulus optimists. The two key policy headwinds to the economy, zero-Covid and the property market, will remain in place. Zero-Covid is to be “unswervingly” adhered to, and houses are still “for living in, not for speculation”. No mention was made of the growth target, and while monetary and fiscal policy “should effectively make up for the lack of social demand”, this is only with the goal of keeping economic activity within a “reasonable range”. We retain our full-year growth target of 3.5%, with no significant new stimulus expected.
Policymakers have rolled out a series of measures in recent days and weeks, in an effort to stabilise the economy in H2. Local governments will reportedly be allowed to issue part of their 2023 bond quota in 2022, pulling forward infrastructure spending. But we are sceptical of the likely impact, given the constraints local governments still face, discussed here.
Similarly, recent measures on property fall far short of a bailout, and indeed we doubt they were intended as one, as we argued here. Further policies, aimed at boosting bank lending to property developers, also seem likely to struggle. The loans still need to be commercially viable, and if they were, they would already have been made. The real estate downturn has further to run.
Growth should still recover in Q3, thanks to the reopening-led rebound, and supported by stimulus measures. But we do not expect the 5.5% target to be reached, as this would require H2 growth of 8.5%.
What the Politburo has signalled, moreover, suggests that policymakers now accept this outcome. This should disrupt the reflexive “bad news is good news” response of markets to Chinese economic data, because weak growth no longer automatically implies a greater dollop of stimulus is in the offing.
Welcome to Japan 2.0.