Credit: Relief in China credit amid reassurances

Sentiment improves but risks remain
Chang Wei Liang22 Oct 2021
    Photo credit: Unsplash Photo

    Chinese policymakers have begun to weigh in on Evergrande and property risks. PBoC’s head of financial markets, Zou Lan, spoke last Friday to reassure markets that risks related to Evergrande were “controllable”. The same message of controllable risks was then repeated by PBoC Governor Yi Gang over the weekend, and finally affirmed by Vice Premier Liu He himself this week. Given such rhetoric by the top brass to contain risks, we expect China to begin taking stronger measures to contain turmoil in Chinese real estate credit.


    Two important points were clarified by the PBoC last week. First, it assured that financing support will be provided for project resumption, which solidly affirms that the interests of homebuyers are paramount. This should calm jitters for prospective homebuyers amid Evergrande’s distress, and may provide a boost to property sales that had contracted quite severely in Q3. Greater sales imply a less bumpy deleveraging process for developers, and should support real estate credit. Second, the banks were cited as having misunderstood regulators’ policies on lending, resulting in extreme financial strains as real estate firms and homebuyers had been denied loans. We have identified in last week’s note that a sharp contraction in real estate loans and mortgages this year was the major factor contributing to liquidity stresses amongst developers. Therefore, if banks are being advised by the PBoC to accelerate mortgage and loan disbursals in Q4 as reported, it should lessen liquidity stresses among developers going forward.


    With this slew of reassurances from top officials, Chinese real estate USD credit have rebounded from last Thursday’s lows. Investors are positioning for a policy recalibration, including a relaxation of lending policies and more support measures for property sales. Our China DACS real estate subindex has seen a significant compression of 21bps this week, as many distressed real estate bonds have recovered losses. Despite an improvement in sentiment, we believe credit for the riskiest firms is still likely to remain unfavoured. China may recalibrate its approach, but it is not likely to retreat from disciplining firms that have blindly and excessively expanded their businesses.


    Chang Wei Liang

    Credit & FX Strategist
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