Goldman says China property rescue will fail.
We think the latest joint notice from the People’s Bank of China (PBoC) and the China Banking and Insurance Regulatory Commission (CBIRC) is a more concrete, systemic approach from government to address liquidity pressure in the property industry and deteriorating market sentiment compared with previous measures (Exhibit 1 – Exhibit 3). Strong follow-on execution should have the following potential benefits for the industry: 1) reduce potential defaults from developers in the near term; 2) reduce completion risk more materially; 3) potentially help new starts and project construction to recover from their current low level; 4) help broader market sentiment (including supply chain players and prospective homebuyers) to recover gradually, which might support property transactions to bottom out. In addition, we expect POE developers still in normal operation will benefit the most in terms of their sales and project construction outlook, followed by SOE developers.
We lay out two scenarios (Exhibit 4) to gauge the potential upside to our current base-case industry forecast for 2023E by assuming different impacts on developers operations (breakdown by SOE/POE) from government policy support. We think the impact for developers facing high liquidity pressure (FHLP) will depend on 1) asset quality – high-quality assets could provide more availability of incremental financing, such as bond issuance with credit enhancement and trust loan, as well as potential for asset disposals; and 2) strong and broad property transaction recovery, which is critical for the credit cycle to normalize after initial policy-driven liquidity support.
