Chinese Government Offers Support to Struggling Property Developers

Street of residential houses
A study from Bankrate once found that 76% of everyday consumers were wary of the stock market, finding it too risky and complicated. For this reason, perhaps, many people in the United States and around the world have begun to prefer investing in property, which is often seen as more stable and advantageous. This is especially true in China, where citizens have aggressively pursued properties in and out of their country for years. However, as the nation’s property sales have slumped and credit has grown tighter, some of these investors have fallen on hard times. Now, the Chinese government seems to be offering some of these property developers a helping hand.In March, Evergrande Real Estate announced that three major state-owned banks and a private lender have agreed to extend the firm credit lines worth 100 billion yuan, or $16.1 billion. As of June 30, 2014, the group’s borrowings totaled 151.8 billion yuan, an increase of 39% from the end of 2013.

This news came on the heels of state-controlled China Orient Asset Management Corp.’s February announcement that it planned to buy a 50% stake in Shanghai Zendai Property Ltd. for 1.5 billion Hong Kong dollars, or $193 million. The asset management firm had previously extended 1.96 billion yuan in loans to Zendai, and has since offered to buy the remaining shares it does not own.

Meanwhile, state-backed China Communications Construction Group had stated in December that it is buying a 24% stake in Greentown China Holdings Ltd., a Hangzhou-based luxury property developer, for 6 billion Hong Kong dollars. Economists are currently speculating that this decision started a trend of Chinese officials trying to support developers to avoid a major shakeout.

The property market accounts for around one-quarter of China’s economic output when related commercial industries like steel and appliances are included. And this sector is almost certainly struggling: there is a surplus of homes in many cities, some smaller developers have defaulted on loans, and many larger developers have seen their margins narrow as their inventories rise. Experts say these problems could extend to other areas, such as banking and construction, if property developers defaulted on their loans. And the largest property developers could present unseen risks for the county as a whole if they were to fail.

For this reason, deal-making in the Chinese property sector has surged over the course of the past year, with state-backed organizations paying a major role in these negotiations. Deals for equity stakes in the industry have totaled $10.9 billion thus far in 2015 alone, almost the same amount seen over the past four full years combined. Of the seven deals known to have been made this year, four involved state-backed companies, representing two-thirds of the deal value.

But while some think the situation may be dire, other analysts have speculated that these state-backed firms may merely be taking advantage of their access to credit to take risks. All of the companies that have made deals are considered unique, and an opportunistic investment could pay off in time. For example, the Beijing-based China Communications Construction Group, which builds ports, roads, bridges, tunnels and heavy machinery, stated that it was investing in Greentown China Holdings Ltd. to build a better real estate industry chain.

Similarly, Evergrande Real Estate, a developer with holdings is more than 150 cities across China, claimed that its new loan agreements were routine and strategic. However, Evergrande’s debt in proportion to their equity was 287% by the end of June 2014, up from 165% in December 2013, strengthening claims that some of the companies being supported by the Chinese government may need help.

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