If there is one market that cannot be allowed to even wobble, it is the property market. It is the heart of the Chinese economy, and the vast bulk of personal wealth in the country is held in the form of property ownership (even if the ownership is actually leasehold for a maximum of 70 years). But there are signs of problems. That is not to say a collapse is in sight — the ability of the Center to control all the moving parts far exceeds that of the US government around the time of the 2007 bubble which caused the Global Financial Crisis. But these will still be worrying times in some offices in Beijing.
The most visible part of the problem is China’s largest property developer, Evergrande, which is wallowing in debts amounting to $300 billion. How to bail it out without causing a massive market ruction is the problem. Some player is required to step up and embrace the company, swallow the debt and allow for the problems to be resolved quietly and opaquely, with lots of haircuts and reduced payments along the way. Such as CITIC just did for the troubled state assets firm, Huarong. But there aren’t many players big enough to choose from.
The main development this week was a payment, but only partial, by Evergrande of outstanding debt to a Shanghai paint company, largely not in cash but in kind — apartments which have not yet been built. Now, that is optimism.
All this has a flow-on effect for other property developers and their ability to get loans or cover existing loans as they roll over, and also at some point on investor sentiment with regard to buying apartments and at what price. That is where it gets sticky for the developers and for the local governments that depend on the sales of land for property development to fund themselves. There has also been more talk about the Center wanting to do a property tax, which would solve the problem of local government financing, but various efforts to implement it have always been canceled so far due to virulent negative market reaction. This week saw a statement from one official saying that a property tax, if implemented, would be unlikely to be more than 1% of market value. A quick and unofficial poll suggests that would be considered high and problematic. It’s all going to pass, but if there is a brick wall out there in the mist, it probably has the word “property” stamped on it.
In “Decoupling” news, Tencent announced it is splitting Weixin and WeChat, that is the domestic and foreign parts of the app. How that plays out for users, who knows, but it presumably will severely limit the extent to which information on one will be available to the other. And in “Common Prosperity” news, the founder and CEO of JD.com, Richard Liu, has announced he will step back to focus on “research.” Smart guy.
Have a great weekend.