Only a few days ago we reported on the major problems in the Chinese real estate market amid signs that some of China’s largest real estate developers are having cash flow issues. This market has been pushing further and further ahead over the last couple of years despite the fact that the Chinese government has been attempting to restrict speculative investment and house price increases. There are rumours that a number of real estate companies are struggling, overseas investors are moving to the sidelines and a significant increase in available floor space is not helping the issue.
While the Chinese government is not renowned for U-turns and for supporting capitalist markets, there is speculation amongst Hong Kong real estate experts that changes may well be afoot. As a consequence we saw a major increase in Hong Kong quoted property stocks with a suggestion that at least two local authorities could be about to soften their stance on homeownership.
Will it be enough to support the market?
The very fact that anonymous sources have been quoted across the financial press, and some property share prices reached their 10% daily increase limit, would indicate there is something behind this story. If, and we await confirmation of any change in policy, the Chinese government has effectively sanctioned a slackening of home ownership rules in some parts of the country then this should offer at least a short-term respite to the troubled Chinese real estate sector.
Quote from PropertyForum.com : “Only a few days ago we reported about the impending default of one of China’s well-known real estate development companies, in the shape of the Zhejiang Xingrun Real Estate Company, and the fact that there were problems in the real estate market.”
We can only assume that the problems behind the scenes, to which the Chinese government would be privy, may well be worse than many at first predicted. Despite the fact that China has not always been welcoming of capitalist ideals there has certainly been a general softening of the previous hard stance of years gone by.
Will this prolong the agony or breathe life into the sector?
It will be interesting to see how any rule changes impact the market in the short to medium term and indeed whether they offer something of a respite and potential rescue package for troubled Chinese real estate developers. Many had automatically assumed that the Chinese government would allow the market to flounder, for weaker companies to go under and therefore teach the capitalist leaders of China’s larger companies that they could not always depend upon the government. Today’s developments, however unexpected, would seem to indicate a very different stance by the government of China.
There will still be major problems in the short to medium term with regards to excess floorspace, with yet more prime developments coming online over the next couple of years, but if Chinese banks, Chinese investors and Chinese real estate companies can make it through this difficult period then all should be well in the longer term. In reality the Chinese government, in a perfect capitalist world, could not afford to let the real estate market collapse because this would reduce overseas investment, see domestic investment fall and not only professional investors but also the general Chinese public would likely suffer in one way or another.
While the rumours and difficulties of the last few weeks have had an impact on the Chinese real estate market, today’s developments are interesting to say the least. If the government does indicate a softening of it previously restrictive policy on homeownership across the country then we could be looking towards a very different future for the Chinese real estate market. We await with anticipation confirmation of the next move although it has to be said that property company investors seem to have jumped the gun, whether they are informed investors are speculators will become clearer over the next few days.