• Fri. Dec 8th, 2023

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China Property Stocks, Bonds Rally on Reported Fund Help

(Bloomberg) — Chinese property stocks and dollar bonds rallied Monday, as a reported move by Beijing to establish a fund to support developers fueled optimism about a turnaround for the struggling sector.

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A Bloomberg Intelligence index of the country’s real estate firms jumped 1.7%, the most in a week. China’s high-yield dollar notes, predominately issued by developers, rose at least 1 cent on the dollar, according to credit traders, with a Bloomberg gauge tracking the sector set for the longest winning streak in two months.

Investors are resuming bets on the battered industry after REDD reported that China’s State Council has approved a plan to set up a fund to support 12 developers and a few new distressed real estate firms nominated by local authorities. If confirmed, the move would mark one of the most direct measures yet taken by Beijing to salvage a sector roiled by massive defaults, slumping sales and a widening boycott on bank loans.

“The mortgage boycott is effectively forcing Beijing to ease credit conditions for developers,” said Amy Xie Patrick, a portfolio manager at Pendal Group Ltd. “The real estate fund, if confirmed, is a stronger initiative compared to previously guiding state banks to lend to property developers, but it won’t be enough to solve the problem unless it can be capitalized by a blank cheque from the Chinese government,” she said.

According to REDD, the fund secured 50 billion yuan ($7.4 billion) from China Construction Bank Corp. and a 30 billion yuan relending facility from the People’s Bank of China. It can be upsized to between 200 billion yuan and 300 billion yuan, it added.

Bloomberg News first reported some aspects of the plan last week, revealing that regulators have asked China Construction Bank, the nation’s largest mortgage lender, to explore a pilot program to set up a fund with selected local governments to purchase projects under construction that have yet to find buyers, with the aim of converting them into apartments for long-term rentals.

The reported plan for the state fund offers the latest indication of growing ease among policymakers over a deepening housing bust that threatens both financial and social stability, as it sends shock waves through China’s 400-million-strong middle class and upends the belief that real estate is a surefire way to build wealth.

Among the top stock gainers, Guangzhou R&F Properties Co. gained 5.7%, with Country Garden Holdings Co. was up 4.5%.

In the credit market, dollar bonds of investment-grade Chinese developers jumped in tandem with their junk peers, led by China Vanke Co. and Longfor Group Holdings Ltd.

Despite the gains, other corners of China’s debt market continues to flash warning signals. For example, two companies in China’s property industry saw their domestic bonds become worthless when pledged for loans in the exchange-traded market last week, underscoring rising stress in the sector.

To some observers, the reported size of the state fund is far from enough to ease the crisis.

The 12 developers expected to benefit from the fund rescue have a combined short-term debt of 742 billion yuan, UBS AG analysts including John Lam wrote in a report. The number would swell to 4.05 trillion yuan when taking into account the amount owed to homebuyers and suppliers, they added.

Despite the fund’s limited size, “clearly the government is signaling it wants to restore homebuyers’ confidence and encourage them to start purchasing houses again,” said Steve Wong, an analyst at Essence International Financial Holdings Ltd. “Setting up a fund is more feasible since a broad-based easing for the sector is unlikely.”

(Updates with closing prices and additional analyst comments)

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