Caution urged as China pledges support for some private developers

Hong Kong — China will guarantee new onshore bond issues by a few select private developers to support its embattled property sector, sources said on Tuesday, while the state planner said it would boost economic demand and speed up infrastructure projects.

News of the planned state support for some better-quality private developers saw the Hang Seng mainland properties subindex rise by as much as 10% at one point, before profit taking pared gains.

Policymakers have been trying to stabilise the sector that accounts for a quarter of the national GDP after a string of defaults among developers and a slump in home sales.

The property sector’s troubles and weak consumption have weakened a nascent recovery in an economy that has been hobbled by strict Covid-19 restrictions.

Bleak data for July showed that the world’s second-biggest economy unexpectedly slowed and property investment fell at the fastest clip this year.

And on Tuesday, officials from the state planner gave assurances that policies would be geared to boosting economic demand in “a strong, reasonable and moderate manner” and infrastructure construction would be accelerated in the third quarter of the year.

Yuan Da, a spokesperson at the national development and reform commission, told a news conference that policy banks would grant more credit and more special local government bonds would be issued.

Homebuyers, and existing owners looking to improve their home, would also receive support, Yuan said.

There are also expectations for a cut in the loan prime rate later this month, which could give some relief to mortgage holders.

On Monday, the central bank unexpectedly cut the rate on 400-billion yuan ($59.33bn) of one-year medium-term lending facility (MLF) loans to some financial institutions by 10 basis points (bps) to 2.75%.

Select few

Addressing fears that developers regarded as financially sound could also be affected by the malaise gripping the property sector, four sources with knowledge of the matter said regulators have asked state-owned China Bond Insurance (CBI) to provide guarantees for bond issuance by Longfor Group and CIFI Holdings.

Two of the sources said Longfor has already sold 3-year and 5-year notes totalling up to 1.5-billion yuan with a guarantee from CBI.

CBI will provide “full amount, unconditional and irrevocable joint liability guarantee” to these medium-term notes, sources said.

Financial information provider Redd first reported the plan to provide guarantees for new bond issues by a few select mainland bond issuers on Monday evening.

Its report said policymakers had drawn up a list of six developers regarded as financially stronger, including Gemdale Corporation and Country Garden Holdings, whose bond issues would receive guarantees.

Redd also said policymakers were considering asking state investors to subscribe for new notes issued by developers. The issuers would have to provide collateral for the state guarantee but the use of proceeds would be flexible, it said.

CIFI, Country Garden and Longfor declined to comment. CBI and Gemdale were unavailable for comment.

The Hang Seng mainland properties index jumped as much as 10% in the morning session, though gains were trimmed to 5.8% by the close. The subindex still easily outperformed the main Hang Seng index, which fell more than 1.1%.

Shares of Longfor and CIFI closed up more than 12%, while Country Garden rose 9%.

In the dollar bond market, a 2026 bond of CIFI was traded at 32.71c on the dollar, compared with 32.11 a day ago. A 2027 bond of Sino-Ocean Group rebounded to 27.437 from 26.750.

Despite investors’ relief that the state was offering support, and expectations that it could be extended to other developers, some analysts urged caution.

JPMorgan analyst Karl Chan told a conference call that it would still be a challenge for developers to repay offshore bonds when their sales were dropping by 40%-50% and offshore liquidity was drying up.

“Right now the Chinese government has been helping on the onshore bond issues, how about offshore bonds?” Chan said.

Reuters