20+250+16+30% = Recovery?

Robin Usson, Senior Credit Analyst at Federated Hermes, comments on recent developments in the China Property Market

Over the past week and a half, there has been growing momentum for a property bailout in China and China HY Property bonds have recovered all the ground lost prior to the September 2022 sell-off triggered by the unforeseen default of CIFI Group. It all started last week with China’s 20 new measures for optimising its COVID-19 response. Subsequently, the People’s Bank of China (PBoC) announced it will provide financial aid worth RMB250bn to support RMB bond issuance by private-owned enterprises. Investment Company Longfor already tapped the program for RMB20bn, a surprisingly fast implementation. 

A notable addition vs. past funding support is the allowance of entrusted institutions to buy RMB bonds as a supporting mechanism, effectively providing a financial backstop to the liquidity crisis in the onshore market. Additionally, over the weekend, the PBOC and CBIRC issued a 16-point rescue plan, which was then followed by the long-anticipated relaxation in escrow account control by the CBIRC. Commercial banks can now issue letters of guarantees to “high quality” developers, which would allow them to withdraw 30% of the cash necessary for construction completion. The funds withdrawn can be used either for construction or project-related debt repayment.

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However, the key to a sustained rally lies in the recovery of the physical markets which is closely linked to consumer confidence which in turn has been heavily correlated with the immutable zero-covid policy. Any signs of recovery in the physical market over the next few months will determine whether this rally has legs.