Since mid-Nov 2022, the People’s Bank of China (PBoC), China Banking and Insurance Regulatory Commission (CBIRC), Ministry of Housing and Urban-Rural Development (MOHURD), and the central government have announced a series of more comprehensive targeted measures to stabilise the property sector in quick succession.
Compared to the previous piecemeal easing policies and largely local level demand side easing measures, the current series of measures are more concerted, coordinated and provide stronger signals from higher level authorities. These supply side easing measures are supportive for sentiment and we expect more demand side easing to be released. Policy direction has reached an inflection point but the effectiveness of these measures to improve POEs’ liquidity still needs to be monitored as prompt implementation and extensive follow-through execution as per policy intentions are critical. More importantly, a physical market turnaround is key to a sustainable recovery for the sector, and this is likely to take time and be bumpy on the back of Covid-19 restrictions, weak home price expectations and still-soft economic/income prospects. China reopening and economic recovery are key to revival of potential buyers’ confidence.
We expect SOEs and high-quality developers which have not defaulted or extended bonds to benefit more than the distressed developers. Names with some commercial properties/offshore assets are also likely to be better equipped than those without, given that such unpledged assets may be used to get financing.
For the sector, we are still missing recovery in home sales, completion of stalled projects and resolution of debt workouts with defaulted developers. There are also other considerations such as the sustained impact of these measures and the degree of willingness of commercial banks to participate. Nevertheless, we think these measures should help alleviate the tail risks of a continued downward spiral in the property sector, mitigate the spillover contagion risk to the entire sector and provide some breathing room for stronger developers. Investment grade (IG) developers should benefit more while the impact on high yield (HY) developers will have to be assessed on a case-by-case basis. Not all surviving developers are out of the woods, and we do not rule out further stresses in the sector.
We expect continued volatility and greater credit differentiation amongst developers. We maintain a defensive view of the sector pending more follow-through and actual implementation of recently announced measures. Switching out into quality names when prices permit remain an option to potentially quicken the recovery process. Risks of falling short of expectations of the effectiveness of policies and unexpected defaults of large benchmark still surviving developers could unwind some of the rally we have seen over the past weeks.
What to watch next: Implementation and execution of recent measures, any further policy support from the Central Economic Work Conference in Dec 2022, liquidity/debt repayment progress of still surviving and large benchmark POE names.Disclaimer applicable to recommendation
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