China’s housing market is . . . not good

China’s decision to stop publishing youth unemployment statistics is pretty funny. Unfortunately, the data it still publishes has looked deeply unfunny lately.

Last week China fell into d*******n, and yesterday the People’s Bank of China attempted to get ahead of data showing slowing retail sales and industrial output with a pre-emptive rate cut. But that’s done little-to-nothing to calm things down.

China’s much-touted reopening boom seems to have fizzled out incredibly quickly. As Matt Klein points out, it is now probably growing more slowly than the US — which is pretty wild when you remember that China has comfortably been the single biggest contributor to global GDP growth since the financial crisis, adding the equivalent to almost three Germanys.

We got even more dour data today. The Chinese National Bureau of Statistics’ new home price data for July averaged an annualised seasonally adjusted month-on-month decline of 2.5 per cent for the 70 cities measured, according to Goldman Sachs calculations.

Lower-tier cities saw the biggest declines, but the housing downturn is looking increasingly broad-based, with even tier-1 cities like Shenzhen suffering a slight dip in prices. Kelvin Lam from Pantheon Macro notes that 49 out of the 70 cities surveyed saw new-home price declines in July, compared to just five in March.

Existing home prices are also still falling, with a 0.5 per cent month-on-month decline in July, and analysts are sceptical the PBoC’s rate cut will do much to dent the trajectory. Easier monetary policy “may only lead to an “L-shaped” recovery in the sector in coming years”, Goldman noted.

JPMorgan’s China economists are also alarmed at recent developments. In a note this morning they wrote (with JPM’s emphasis below):

Secondary home prices continued to underperform, with a consistent drop in both month-on-month and year-on-year terms, across all city tiers. This has further narrowed the price gap with new home prices. As we have flagged, if the secondary home prices fall below new home prices, this could be a game-changer in that a mutually reinforcing decline in new home prices and secondary home prices may be formed, leaning the way for the Japanification risk to materialize.

This obviously isn’t happening in isolation either. The recent default of Country Garden Group has underscored the widening damage caused by the real estate rot, while the troubles of Zhongrong Trust has done the same for China’s vast shadow banking industry.

Here are JPMorgan’s analysts again. Alphaville’s emphasis below:

In recent weeks, we see mounting financial risks from the property sector (e.g., Country Garden), the shadow banking sector (e.g. Zhongrong Trust), and LGFVs. Country Garden Group, the sales champion of China’s housing market in 2017-2022, missed coupon payments for USD bonds last week and is managing to fulfill the repayment during the 30-day grace period. While the incremental contagion in the credit market may be smaller compared to the Evergrande default episode in 2021, as around two-thirds of private developers have already defaulted, it could become a source of significant downside risk to our GDP growth forecast in 2H and 2024, and intensify the financial risk concerns. The developers’ liquidity distress also points to limited capability and low incentive to purchase land, and start new home projects. Ensuring home completion of existing projects will be the priority.

Last week, Zhongrong Trust was reported to have delayed payment of maturing wealth products, and its largest shareholder, Zhongzhi Group has run into liquidity distress in recent months. Our banking analysts estimate that Zhongrong Trust’s total AUM at risk could be as high as 67bn yuan, and the contagion risk to the trust industry or other alternative financing channels is rising. While developers’ exposure to trust financing is likely limited, with the outstanding balance at 1.1 trillion yuan by 1Q23, 7% of all trust financing or 5% of developers’ debt (7% for private developers, and 1% for SOE developers), LGFVs’ trusting financing exposure could be larger.

While there is no concrete official breakdown of LGFVs’ overall interest-bearing debt by instrument type, we estimate that out of the 56 trillion yuan LGFV interest bearing debt, around 24% is LGFV bonds, 60% is bank loans, and 15% is shadow credit such as trust loans. In this sense, the spillover impact from recent trust sector liquidity distress to the LGFVs could be larger than that to the property sector. Besides, with the ongoing and likely intensifying sluggishness of the land market, LGFVs’ liquidity could face rising challenges. The reported 1 trillion yuan local government debt resolution scheme signals local governments’ funding difficulties, especially those with heavy reliance on land sales, but the resolution scale is small compared to the size of total LGFV debt and, hence, it is more an effort to mitigate near-term liquidity pressure. With renewed trust sector liquidity distress and intensified property and land market weakness, we think LGFV debt related risk is rising, altogether pointing to mounting systemic financial risks.  

We think the urgency for housing policy relaxation is rising. Other than macro and financial drags, a double-dip in the housing market, especially after the housing policy shift last November that aimed to increase funding support for developers, may also shake the market confidence in the ability of the Chinese government to control risk and stabilize growth. The slow pace of policy moves and absence of concrete action in the past few weeks (after the Politburo meeting) are puzzling, and have been gradually eroding market patience. We expect housing policy easing measures will be announced in the coming weeks, e.g., lower down payment requirements, relaxation in first home mortgage definition and relaxation in home purchase restrictions.