As Housing Prices Crash at Record Speed, Chinese Government Bails Out Developer, Injects Liquidity

And the Chinese government declared that they would supposedly conduct reforms. But the reforms they have currently embarked on has been to save the status quo.

The Chinese government just rescued a major property developer.

From the New York Times:

Chinese banks have extended $16 billion in credit lines to shore up one of the country’s largest and most heavily indebted home builders, as pressure mounts on developers short of cash in a slumping property market.

The move by a group of mainly state-run banks to bolster the builder, Evergrande Real Estate Group, which is controlled by the billionaire Hui Ka Yan, is the latest sign of tumult in China’s sprawling housing sector.

Developers are rushing to secure financial support as sales volumes and housing prices plunge, weighed down by a growing overhang of unsold homes. The Kaisa Group, once a favorite of foreign investors, nearly defaulted on its offshore debt this year before being rescued by another developer.

Evergrande said on Tuesday that since February, it had secured new credit lines totaling 100 billion renminbi, or $16.2 billion. Those included a new 30 billion renminbi commitment on Monday from the Bank of China, which regards the developer as “its most important bankwide long-term partner,” Evergrande said in a news release.

The current measures has been meant as band-aid to a hemorrhage...

Analysts said the support from the banks — which also include the Agricultural Bank of China, Postal Savings Bank of China and the privately controlled China Minsheng Bank — would provide temporary relief but would fall short of addressing the company’s deeper problems.

Mounting debts and slumping sales “are fundamental challenges that can’t be resolved short term by government’s bailing them out on ‘too big to fail’ pretense,” said Junheng Li, the head of research at JL Warren Capital in New York.

“The company has been under financial distress for a long time,” she added.

Whether it is short term or not, resources redistributed to non-productive activities would worsen the current conditions going forward.

 

And this comes as the crash in Chinese home prices has even been intensifying.

From Investing.com (bold mine)

Property prices fell again in most major Chinese cities in February, amid continuing anxiety about the state of the country’s real estate sector. New house prices declined in 66 of 70 large- and medium-sized cities surveyed, according to China’s National Bureau of Statistics (NBS). Prices fell an average of 0.4 percent on the previous month, ending 5.7 percent lower than a year earlier, according to Reuters. It is the biggest year-on-year fall since the national survey began in 2011.

The only major cities that did not see a drop were the southern special economic zone of Shenzhen, where prices rose 0.2 percent, and the central industrial city of Wuhan, which saw no change. Prices for the secondary market also fell in 61 cities, though there were rises in five cities. The bureau blamed the sharp fall partly on February’s week-long Chinese New Year vacation, and predicted that prices would rebound this month. That did not stop the figures attracting widespread attention, however: one Chinese-language news website blared the headline: “Hangzhou house prices back to their level of five years ago?”

From CNBC (bold mine)

China new home prices registered their sixth straight month of annual decline in February, as tepid demand continued to weigh on sentiment despite the government's efforts to spur buying. 

New home prices fell 5.7 percent on year in February, according to Reuters calculations based on fresh data from the National Bureau of Statistics on Wednesday. The reading was worse than January's 5.1 percent decline and marks the largest drop since the current data series began in 2011.

Meanwhile, both Beijing and Shanghai clocked home price declines. In Beijing, prices fell 3.6 percent on year following a 3.2 percent drop in January, while prices in Shanghai fell 4.7 percent, following January's 4.2 percent drop.

So pressures from housing problems has filtered into the credit system, thereby manifesting strains in the repo markets.

The government’s response? Well, to inject money.

From Bloomberg: (bold mine)

China’s interest-rate swaps dropped the most in six weeks after the central bank took extra steps to boost liquidity to cushion an economy grappling with capital outflows and slowing growth.

The People’s Bank of China said it auctioned seven-day reverse-repurchase agreements at 3.65 percent, down from 3.75 percent last week. The central bank also rolled over 350 billion yuan ($73 billion) of loans it extended to banks via its medium-term lending facility in December, according to a person with knowledge of the matter, who asked not to be identified because the information hasn’t been made public. An unknown amount of lending was also added, the person said.

So reforms have actually been about the preserving the status quo.

The Chinese government reported that credit in February unexpectedly ballooned

From Bloomberg (bold mine)

Aggregate financing was 1.35 trillion yuan ($215.5 billion) in February, the People’s Bank of China said in Beijing Thursday, above economists’ median estimate of 1 trillion yuan. New yuan loans totaled 1.02 trillion yuan and M2 money supply rose 12.5 percent from a year earlier. 

With two interest-rate cuts and one reduction to the percentage of reserves banks have to set aside in the past four months, the central bank is seeking to cushion China’s slowdown. Industrial output, investment and retail sales growth missed analysts’ estimates in January and February, suggesting more stimulus is needed to boost the world’s second-largest economy.

“We see continued pretty solid core bank lending but a further slowdown in shadow banking,” said Louis Kuijs, Royal Bank of Scotland Group Plc’s chief Greater China economist in Hong Kong. “Authorities are trying to push liquidity into the system, but in terms of real economic entities, demand for credit is not very strong.”

But obviously the sponges for those credit expansion have likely been via State Owned Enterprises or politically controlled private institutions. 

As for the real economy, the disparity between credit expansion in the light of “demand for credit is not very strong”, crashing housing prices, and stagnating real economy implies that the Chinese economy has been plagued by substantial balance sheet impairments. You can lead the horse to the water but you cannot make him drink. 

However Chinese stocks continue to deviate from reality with its sustained upside move.

Of course it could most likely be that part of the credit expansion being foisted by the government to the system has been finding their way to chase yields via stocks.

So reforms has been about blowing one bubble after another. All temporary measures intended to kick the can down the road.

And naturally, because credit infused into the system will spillover to some areas of the real economy, there will be an outlet for this.  A clue to this has been that aside from retail punters, the shadow banking system have most likely been another major driver of the Chinese stock market mania.

From Reuters: (bold mine)

China's trust firms, with total assets of $2.2 trillion, are shifting more cash into frothy capital markets and over-the-counter (OTC) instruments instead of loans - blunting regulators' efforts to reduce shadow banking risk.

By redirecting money into capital markets and OTC products like asset-backed securities (ABS) and bankers' acceptances, trusts are acting less like lenders and more like hedge funds or lightly regulated mutual funds.

And the shift - a response to a clampdown last year on trust lending to risky real estate and industrial projects - means a significant chunk of shadow banking risk is migrating rather than shrinking…

Previously, people who bought into opaque wealth management products, many of which were peddled by banks but actually backed by trust assets, found themselves heavily exposed to real estate loans. Trust firms' changing asset mix means these investors may now instead find themselves exposed to high-yield corporate debt (junk bonds), volatile stock funds or risky short-term OTC debt instruments.

Oh, as for the pace at which housing prices have been crashing, they appear to be shortening the path to a Chinese recession/crisis. 

So there should be more defaults ahead.  Yet can the Chinese government fill in every defaulter's shoe? If not, market developments are likely to even deteriorate further.

As I previously noted:

Should the US housing bubble bust experience serve as a model, then a sustained housing deflation in China means that the latter's economy may fall into recession by mid 2016. 

But if the rate of the unwinding of the Chinese housing bubble accelerates, then this may shorten the time window. 

However, the Chinese government has been preemptively easing. The Chinese government has been joined by many other global central banks who appears to have also been frantically easing. 

Will such joint actions help extend or delay the process? Hmmmm.

It’s a complex world with manifold factors. But the writing is clearly on the wall.

Record stocks in the face of record imbalances at the precipice.

And once a recession/crisis has surfaced expect volatility in Chinese politics.

So what will the Chinese government do aside from reforms that has actually meant preserve the status quo?

Beat the drums of war to divert public attention from economic travails and to shore up domestic political capital, perhaps?