Xi Jinping reshapes China property market paving way for state dominance

The days of blistering home price gains and debt-fuelled building sprees by billionaire property tycoons are set to fade. PHOTO: BLOOMBERG

BEIJING (BLOOMBERG) - For any government, overhauling a nationwide residential real estate market would be risky under the best of circumstances. Chinese President Xi Jinping is attempting it at a time when the economy is slowing, Omicron is threatening his zero-Covid-19 policy and relations with the outside world are increasingly fraught.

As that perilous combination takes a growing toll on Chinese financial markets, one question keeps popping up: What is Mr Xi's endgame?

Given the Communist Party's opacity and its history of backtracking on property reforms, the answer is impossible to know for sure. But China watchers have begun sketching out a likely future for the real estate market that looks far different from its more than two-decade run of supercharging economic growth, household wealth and government revenue.

In short, the days of blistering home price gains and debt-fuelled building sprees by billionaire property tycoons are set to fade. They will be replaced by a much more staid market where the authorities are quick to clamp down on speculative frenzies and development is dominated by state-run companies earning utility-like returns.

"If we call the past decade a golden age for the real estate industry, it is now trapped in the age of rust," said Beijing-based founding partner Li Kai of bond fund Shengao Investment, which specialises in distressed debt.

That transition promises to be especially painful for privately owned developers like China Evergrande Group that have already saddled international stock and credit investors with billions of dollars in losses. At the same time, it could go a long way towards achieving two of Mr Xi's most prized goals: a more stable Chinese financial system and a narrower gap between the country's rich and poor.

Mr Xi's challenge is to pull off the transformation without sparking a crisis on the eve of a leadership confab widely expected to cement his rule for life.

While few analysts are predicting an imminent financial meltdown, risks from the real estate market are growing. Weaker property companies are under immense stress, hit by a double whammy of punishingly high borrowing costs and slumping sales. Lower-rated developers including Evergrande are already defaulting on dollar debt at record rates and contagion is spreading to stronger companies. Shares and bonds of Country Garden Holdings, China's largest developer by sales, sank on Thursday (Jan 13) following a report it struggled to find demand for a new convertible bond.

There are plenty of reasons why China needs to remould its property market. The sector is riddled with speculative buying and is over-leveraged, posing a risk to the financial system in a downturn. The price of housing is a burden on China's already-shrinking families. The average cost of buying an apartment in Shenzhen was about 44 times the average annual salary for local residents in 2020. It worsens inequality as wealthy landlords hoard properties. Millions of homes sit empty and some construction projects damage the environment.

The industry has an oversized impact on the economy. When related sectors like construction and property services are included, real estate accounts for more than a quarter of Chinese economic output, by some estimates. More than 70 per cent of urban China's wealth is stored in housing.

"The property market is a symptom of the underlying problems in China's economy," said Mr Craig Botham, chief China economist at Pantheon Macroeconomics. "For decades, it has been the go-to, easy solution to generate local government revenue, boost economic growth, and provide households with a place to put their money and see it grow."

The solution, as is increasingly the case in Mr Xi's China, is tighter control by the state.

"The government wants to encourage consolidation in the housing sector - larger and often state-owned developers will likely take over the weaker players," said Mr Gabriel Wildau, a senior vice-president at global business advisory firm Teneo. "They want to break the economy's addiction to property."

The Chinese authorities have targeted excess in the property market before, but the importance of the sector to the economy meant such drives petered out when growth targets were threatened. Beijing is seeking to reduce the reliance on property by boosting investment in high-tech and clean energy industries - part of Mr Xi's plans to make growth more sustainable and higher quality. Yet such a process will take time and patience.

Officials' determination is being tested. China's property downturn is accelerating, even prompting a warning from the Federal Reserve. In cities nationwide, the decline in new home prices has deepened every month since September, when prices fell for the first time in six years. Home sales continue to sink. Data next week may show that property investment grew just 5.2 per cent last year, economists predict, the slowest since 2015.

Chinese developers are resorting to bond swaps, payment delays, equity sales and other desperate measures to repay debt. At least eight of the firms have defaulted on dollar bonds since October. That includes Evergrande, whose crisis has ensnared lender China Minsheng Banking, the world's worst-performing bank stock. An index of property shares fell 34 per cent last year, its worst since the global financial crisis in 2008.

The rout in China's high-yield dollar bond market is accelerating, triggered by firms previously considered financially more sound than Evergrande - like Shimao Group Holdings and Sunac China Holdings. More worryingly, it is spreading to higher-grade issuers such as Country Garden. Shares of the developer plunged almost 8 per cent on Thursday, while its dollar bond due in 2025 fell 4.8 cents to 74.4 cents, poised for its largest drop since Nov 1.

Whatever form Beijing's campaign to deleverage the property market takes, it is clear that the era which enriched real estate moguls and home owners alike has ended. A duller, more stable future awaits, if the Communist Party can stay the course and dodge a financial crisis.

"The golden age of booming property prices and soaring revenue for developers is probably gone," said Mr Gary Ng, senior economist at Natixis. "Home prices will only grow at a tightly managed zone in the future, meaning housing will look increasingly like utilities."

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