Chinese Real Estate Rally after Easing Measures for Buyers

Chinese property stocks rally after support measures announced on Friday, continue through Monday. The share of Country Garden Holdings gained 14.61% from HKD 0.89 before Typhoon closing in Friday to HKD 1.02 in today, pushing Hong Kong’s HSI gains over 2.3% while Shanghai’s SSEC and Shenzhen’s SZI both gain over 1%.

The measures included lowering the minimum down payment and easing rules and restrictions on mortgage for some home buyers at the tier-1 cities (biggest cities like Beijing), causing property sales soared by thousands of units over the weekend as well as real estate stocks like a soaring 19% Country Garden Holding throughout Monday.

Some analysts are still concerned about these measures because it doesn’t directly affect the old debt and undelivered homes but putting people on the new mortgage to give these real estate developers more liquidity, continuing the debt cycle. 

The cycle could continue as long as there’s more financial inflow than the outflow. The outflow is a spending on unfinished or undelivered homes, while the inflow is the mortgage from finished building and new housing demand from this measure. Still, some analysts wonder how long the cycle could last.

Before the recent years, Chinese real estate developers have been using debt financing to build homes by not just borrowing from the bank but also issuing bonds to investors and selling the paper or unbuild home projects to the home buyer. The more they can sell, the bigger project they can build also the price soared with it hence the bubble.

After the 3-red line policy issued by Chinese authorities, the liquidity from this cycle has been cut off, causing some delinquency by unfinished-home buyers, reducing the developer’s revenue, lessening interest payment, downgrading of bonds and borrowing credibility hence the burst of bubble and whole industry along with the economy.