China property: Is a soft landing in the making?

China’s property market woes have dominated the headlines in recent weeks. Global markets have been spooked by the debt troubles of China’s largest property developer, Evergrande Group, with investors considering the macro implications of a default. The effects of the collapse of any given property developer can be hard to quantify, let alone one as big as Evergrande.

China’s property sector accounts for 15% of China’s GDP. If ancillary industries such furniture sales, building materials, home appliances, etc. are included, this figure may amount to nearly 25%. With approximately 4 million employed across these areas, the sector is structurally important to the Chinese economy. It is this fact and the desire to avoid a repeat of the 2015 property market collapse that spurred the Chinese authorities to introduce the ‘three red lines’ deleveraging policy in August 2020. Chinese developers were given till 2023 to meet the debt reduction deadline. It is therefore inevitable for some to become victims of this policy.

As such, Pearly Yap,  a Lead Portfolio Manager for Eastspring Investments’ Equity Income and Listed Real Estate Equity strategies, believes that the Chinese government has knowingly engineered the cooling of the property sector to upkeep the financial system stability, and is fully prepared to handle arising challenges.

Besides, the current property market situation is not as bad as it was in 2014, when the industry was faced with oversupply for the first time in its history. For one, property inventory levels are relatively low and supported by continuing sales growth and a controlled pace of new launch releases by developers. Meanwhile, anti-speculation measures have also kept a lid on property prices. Furthermore, the spillover effect will likely be smaller, as excess capacity in industrial sectors such as coal and steel has come down significantly since 2015.  Given these considerations, we think any slowdown in the property sector would not be as prolonged.  

Many Chinese property developers have also deleveraged to abide by the three red lines policies, and some with high leverage are repaying debt quickly. However, there are a select few large developers who have aggressively grown their balance sheets to fund growth in a loose credit environment. Once the dust settles, the Chinese property sector is set to emerge healthier, and developers with solid balance sheets should be better positioned to gain market share.

Property inventory levels are far below previous peaks

china-property-is-a-soft-landing-in-the-making-fig-1

Source: CRIC, UBS estimates

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