Chinese real estate stocks rise on $44 billion rescue hopes

Shares in China’s largest property developer rose after reports that the government had set up a fund dedicated to supporting the debt-laden sector.

China’s State Council last week approved a plan to set up a real estate fund worth up to 300 billion yuan ($44.4 billion) to support at least a dozen real estate groups, financial news agency REDD reported Monday.

The news pushed the Hang Seng Mainland Properties index, which tracks 10 of the largest Hong Kong-listed real estate firms in the country, as high as 5.4 percent in early trading. Country Garden Group and Longfor Group, two components, were up 8.3 percent and 9 percent, respectively.

Trading in shares of several of the largest components of the index, including China Evergrande Group, Shimao and Sunac, has been suspended in recent months due to the group’s liquidity crises.

China Construction Bank and China’s central bank will inject 80 billion renminbi into the new fund that will help distressed real estate companies complete troubled development projects, according to a person familiar with the initiative.

The fund, which will support at least a dozen real estate groups, was approved by regulators last week and could be expanded to as much as 300 billion renminbi. The person added that in addition to reviving stalled projects, the fund can be used to buy developers’ bonds, issue loans to them, or acquire equity stakes.

The development comes shortly after property buyers across the country threatened to stop paying mortgages on unfinished apartments if construction stopped. While the boycott-affected banks subsequently clarified that their overall exposure to potential payment boycotts was minimal, the threats have alarmed local governments and national regulators.

The cascading liquidity crunch across China’s real estate sector, which accounts for about 30 percent of total output in the world’s second-largest economy, began last year when Shenzhen-based Evergrande defaulted on its debts. On Friday, Evergrande’s CEO and CFO were forced to resign over their responsibility to issue third-party guarantees that froze more than $2 billion in cash in a group subsidiary.

Sector woes and repeated shutdowns aimed at stemming the Covid-19 outbreak have nearly brought the Chinese economy to a standstill, with year-on-year growth slowing to just 0.4 percent in the second quarter.

Local governments across the country, who have had to take responsibility for stalled developments by Evergrande and other real estate firms in their jurisdictions, have asked banks and state-owned asset management firms to help fund the completions.

But according to local government officials and financial executives involved in the bailout discussions, the response has generally been muted as would-be white knights fear most projects will not turn a profit when completed.

It would be impossible to make a return on projects that were completely sold out, said Qin Long of Beijing consulting firm Plenum. “You have to pay the construction companies to finish it, but there is no going back,” he said. “You’re basically throwing in the money.”

“Are local governments willing to write off completion costs? This is a difficult decision to make,” Chen added.

The new fund, led by the China Construction Bank and the People’s Bank of China, is also seeking a “moderate” return on its investment.

Last week, local government-backed groups in Zhengzhou, the capital of central Henan Province, set up a similar fund aimed at supporting cash-strapped developers in the region.

Additional reporting by Tom Mitchell in Singapore

Video: Evergrande: The end of China’s real estate boom

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