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SHANGHAI, Jan. 14 (Reuters) – Based on this week’s developments at China’s most indebted real estate developer, 2022 could see Beijing relax its attempts to purge the sector and make more room for economic stability.
China Evergrande Group (3333.HK), whose difficult financial situation rocked Chinese real estate companies and global financial markets over the past year, was granted a reprieve this week after investors agreed to extend the date of payment of a bond in yuan. Read more
The extension proposal, which a source familiar with the situation has implicitly approved by regulators has offered investors a glimpse of what to expect from other real estate companies scrambling to repay their debts.
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The sector has been at the forefront of Beijing’s attack on bloated industries, high debt levels and overinvestment as it strives for common prosperity and better growth.
But no one really knows how far the Communist Party is willing to go to sacrifice real estate’s strong contribution to the economy, or to dispel unhealthy investor expectations of state bailouts.
Analysts said regulators appear to be pushing for market-based debt restructuring while trying to boost investor and homebuyer confidence and soften the economic impact at a time when the focus is on. again on stability. It’s a difficult balance.
“The concern appears to be focused primarily on homebuyers, secondarily on workers and contractor counterparties,” said Charles Chang, senior director and head of China at S&P Global Ratings. “… the government is showing it would like the market to work.”
“Market discipline will continue to be a theme, but it will not only be for the real estate sector, it will be for other sectors as well. The government’s point of view on this seems pretty clear.”
The stakes are high in a year in which President Xi Jinping is expected to win an unprecedented third five-year term as chair of the 20th Party Congress this fall. Read more
In a recent memo, analysts at JPMorgan pointed to the slowdown in the housing market as the biggest threat to economic stability, noting that a 5 percentage point slowdown in investment could directly and indirectly reduce GDP growth up to ‘to 0.7 percentage point.
Analysts polled by Reuters this week expect China’s economic growth to slow to 5.2% this year.
GAIN GROWTH
The deal between Hengda Real Estate Group of Evergrande and the holders of its 4.5 billion yuan ($ 707.60 million) bonds allowed the company to avoid a technical default that could have complicated its restructuring .
The company is struggling to repay more than $ 300 billion in liabilities, including nearly $ 20 billion in offshore bonds deemed cross-defaulted by rating agencies last month after missing payments. Read more
It’s not the only one, with Chinese developers facing $ 116 billion in debt maturing this year, according to Refinitiv.
Growing stress in the real estate sector has prompted Beijing to ease its crackdown at the margins, relaxing debt-to-income ratio rules dubbed the “three red lines” to facilitate acquisitions by public developers. Read more
“For developments to continue and to limit the risk of contagion, it is important to avoid a large number of companies in difficulty. That is why political support should come, whether through increased lending from state banks or by facilitating asset acquisitions by public developers, “said Wei-Liang Chang, strategist. in foreign currency and in credit at DBS Bank in Singapore.
At the same time, forcing some leveraged developers to restructure their debt could strengthen the message of credit discipline for developers and investors, he said.
Michael Pettis, a non-resident senior researcher at the Carnegie-Tsinghua Center for Global Policy, expressed skepticism that Beijing would make significant progress in managing debt risk in the real estate sector this year, noting that measures such as the relaxation of the three red lines simply allowed the transfer of the debt burden to public enterprises from the private sector more constrained.
“China hasn’t really solved the fundamental problem… You can’t have less debt and the same amount of growth. There’s just no way. And because it’s a politically important year, I guess growth will win again. “
($ 1 = 6.3595 Chinese yuan)
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Reporting by Andrew Galbraith; Additional reporting by Samuel Shen in Shanghai, Tom Westbrook in Singapore and Patturaja Murugaboopathy in Bengaluru Editing by Vidya Ranganathan and Kim Coghill
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