Chinese property stocks rally on $44bn bailout hopes

Chinese property stocks rally on $44bn bailout hopes

Shares in China’s biggest property developers rallied following reports that the government had created a dedicated fund to support the heavily indebted sector.

Financial news outlet REDD reported on Monday that China’s State Council last week passed a plan to establish a real estate fund worth up to Rmb300bn ($44.4bn) to support at least a dozen property groups.

The news pushed the Hang Seng Mainland Properties index, which tracks 10 of the country’s biggest Hong Kong-listed real estate companies, up by as much as 5.4 per cent in early trading. Country Garden and Longfor Group, two constituents, rose as much as 8.3 per cent and 9 per cent, respectively.

Trading in shares of several of the index’s biggest constituents, including China Evergrande Group, Shimao and Sunac, had been suspended in recent months because of the groups’ liquidity crises.

China Construction Bank and China’s central bank will inject Rmb80bn into the new fund that will help distressed real estate companies complete stalled development projects, according to one person briefed on the initiative.

The fund, which will support at least a dozen property groups, was approved by regulators last week and could be expanded to as much as Rmb300bn. In addition to reviving stalled projects, the fund may be used to buy developers’ bonds, issue them loans or take equity stakes, the person added.

The development comes shortly after property buyers across the country threatened to stop paying mortgages on uncompleted flats if construction stalled. While banks affected by the boycotts later clarified that their overall exposure to potential payment boycotts was minimal, the threats have alarmed local governments and national regulatory agencies.

The liquidity crisis cascading across China’s real estate sector, which accounts for about 30 per cent of total output in the world’s second-largest economy, began last year when Shenzhen-based Evergrande defaulted on its debts. On Friday, Evergrande’s chief executive and chief financial officer were forced to resign for their responsibility in the issuance of third-party guarantees that have frozen more than $2bn in cash at a group subsidiary.

The sector’s woes and frequent lockdowns aimed at stamping out Covid-19 outbreaks have brought China’s economy to a near halt, with year-on-year growth slowing to just 0.4 per cent in the second quarter.

Local governments across the country, which have been forced to assume responsibility for stalled developments by Evergrande and other real estate companies in their jurisdictions, have asked state banks and asset management companies to help fund completions.

But according to local government officials and financial executives involved in bailout discussions, the response has been generally muted as potential white knights fear that most projects will not turn a profit when completed.

Chen Long at Plenum, a Beijing-based consultancy, said that it would be impossible to make a return on projects that had been completely sold. “You have to pay construction companies to finish them but there’s no return,” he said. “You’re throwing money away basically.” 

Chen added: “Are local governments willing to write off completion costs? That’s a hard decision to make.”

The new fund led by CCB and the People’s Bank of China is also seeking a “moderate” return on its investments.

Last week, local government-backed groups in Zhengzhou, capital of central Henan province, established a similar fund aimed at supporting cash-strapped developers in the region.

Additional reporting by Tom Mitchell in Singapore

Video: Evergrande: the end of China’s property boom

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