China stock market indexes faded to a roughly flat close on Wednesday, as giant property developer Country Garden grasped for a lifeline and Beijing kept up its barrage of new stimulus announcements. The competing headlines underscore that Beijing is racing against time to revive growth and, especially, property purchases to keep contagion from bad debts spreading through its financial system.
Country Garden Issues Shares To Pay Debt
On Wednesday, Country Garden issued $34-million worth of new shares in Hong Kong at a 15% discount to Tuesday's closing price. The shares were issued to a creditor to pay off a fraction of outstanding debts, which totaled $194 billion at the end of 2022.
Country Garden, which lost $7.5 billion in the first half of 2023, missed two bond payments on dollar-denominated debt this month. The firm is seeking to defer upcoming bond payments. Creditors face a Thursday deadline on whether to grant forbearance.
Meanwhile, developer China Evergrande Group, which defaulted on $340 billion in debt in 2021, resumed trading on the Hong Kong exchange on Monday at an 87% discount. The real estate developer is in the midst of a tenuous, years-long restructuring.
On Sunday, the property developer posted a $4.5 billion loss for the first half of 2023. Evergrande's valuation has fallen to $600 million from more than $50 billion in 2017.
Flurry Of Stimulus Moves
The South China Morning Post reported late Tuesday that local governments have been authorized to sell an all-time-high quota of $521 billion in special-purpose bonds, which are often used to finance large-scale construction projects.
Earlier Tuesday reports revealed that Chinese homeowners will soon get a sizable mortgage-rate cut, lowering their monthly payments and potentially boosting depressed consumer spending. That followed Sunday's unveiling of new government measures to cut trading costs and lift stock prices. On Friday, Chinese authorities announced that they'll ease mortgage rates and sharply lower down-payment requirements for many second-home buyers.
The flurry of new moves has begun to refute the notion that Beijing won't intervene aggressively to shore up economic weakness. Still, the moves stop short of the shock-and-awe measures China had been known for until the past several years. The key unknown is whether the steps taken so far or possible measures to come can resuscitate property sales, which are the lifeblood of China's imbalanced economy. If not, China may face a deep, prolonged slowdown and an era of deleveraging as debts come due for insolvent property developers.
The fallout from a crash in property sales poses broader financial risks to investment trusts and to local governments, which rely on revenue from land sales to fund infrastructure projects.
China Stock Market Trading Costs Slashed
In a Sunday announcement, China's Ministry of Finance said it would halve a stamp duty on stock transactions, to 0.05%. Officials aim "to invigorate the capital market and boost investor confidence," the ministry said.
The Wall Street Journal, citing a Citi analysis, said the fee reduction would cut overall trading costs by up to 40% for A-share stocks. Those are the equities of mainland-China-based firms traded on the Shanghai and Shenzen stock exchanges. B-share stocks, which are quoted in foreign currencies such as the dollar, are more available to foreign investors.
Beijing also loosened rules for buying stocks on margin, lowering the margin ratio to 80% from 100%. On top of that, controlling shareholders will be barred from selling stock if their firms are below the IPO price or haven't issued dividends in three years.
Beijing Gives New Boost To Property Sector
On Friday, Chinese regulators announced several policies to prop the sagging property sector.
The biggest deal is that many repeat homebuyers, either because they're moving or buying a second property, will be eligible for preferential mortgage rates available to first-time buyers, lowering their rate by a half-percent or more.
Further, they'll be able to apply to lower the required down payment. Bloomberg News reported that first-time buyers in Beijing need a 40% down payment, but that rises to as much as 80% for second-time buyers.
Mortgage Rate Relief
On Tuesday, Reuters reported that Chinese state-owned banks will soon offer lower rates on existing mortgages, lowering monthly payments. That could lower the average current mortgage rate by about 60 basis points to 4.11%.
Banks aren't doing this entirely as a give-away, but partly to save themselves. That's because outstanding mortgage debt is now shrinking in China as households use their savings — and in some cases lower-cost loans — to pay down principal. That's putting bank earnings at risk.
Lower monthly mortgage payments could lead to higher household spending, but won't directly provide a lift to property sales.
At the same time banks will cut rates on existing mortgages, they also plan to further cut deposit rates to help maintain net-interest margins. Lower deposit rates could also encourage savers to invest more funds in Chinese stocks.
China Stock Rally Back On?
The CSI 300 index of top stocks on the Shanghai and Shenzen exchanges rose 5.5% at Monday's open, but settled for a 1.2% rise. Hong Kong's Hang Seng Index, though not directly affected by the moves, saw similar action after saying it plans to take steps to boost stock market liquidity.
However, the rally took another step on Tuesday, with the CSI 300 up 1% and the Hang Seng Index 1.95%. The latter emerged from bear-market territory on Tuesday, after having fallen more than 20% from its January high to August low.
On Wednesday, both the CSI 300 and Hang Seng fought to a near draw, dipping fractionally on the session.
Will Beijing Do What It Takes?
A Friday report in the Global Times, with links to the Chinese Communist Party, said the new mortgage policies show that "the Chinese authorities have rich policy tool kits at their disposal, allowing them to act swiftly to tackle emerging headwinds"
The article pushed back against "bleak outlooks on the Chinese economy" published by Western media outlets based on "alleged 'property woes' or 'lack of aggressive stimulus.'"
China's relatively high down-payment requirements contrast with minimal down payments that proliferated in the U.S. ahead of the 2007 housing crash. That left many homeowners in the U.S. with negative equity, contributing to a foreclosure wave when layoffs began to mount.
But, assuming there is a way forward, is there really a will? Numerous economists have opined that China should aggressively stimulate consumption to rebalance the economy. Yet Chinese President Xi Jinping is reportedly wary of encouraging Western-style "welfarism."
China's leadership also "does not like bailouts, particularly of fat cats," wrote Christopher Wood, Jefferies' global head of equity strategy. "Beijing's stance remains more akin to Calvinist free market fundamentalism and advocacy of sound money than many might suppose."
China's 'Crisis Of Confidence'
Julian Evans-Pritchard, lead China analyst at Capital Economics, said in a call hosted by Jefferies for institutional investors last week that China isn't going through a deleveraging crisis, as was seen in Japan in the 1990s. Rather, it's "a crisis of confidence, with households and firms holding back on spending, holding back on investment, and shifting their exposure from risky assets into safe assets like bank deposits and government bonds."
On that point — that there's a crisis of confidence — there's broad agreement. The Covid lockdowns and ongoing decline in property values have hurt confidence among Chinese that have a relatively flimsy social safety net, most of their wealth tied up in real estate and less perceived job security now that economic growth has slowed.
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'Major Signal' Coming?
Pritchard sees major long-term structural growth hurdles. Those include low birthrates and China's split from the West. But he also sees scope for a near-term rebound once Beijing provides the necessary jolt to confidence.
Pritchard says that lowering the 20% minimum down-payment requirement (which is even higher in some cities) "would be a major signal."
While China's new measures to boost the property sector may not go that far, they could be a sign that Beijing won't going to tolerate continued economic underperformance.
"China's broader package of response measures is starting to take shape," Solita Marcelli, chief investment officer in the Americas for UBS Global Wealth Management, wrote in a Monday note. She expects more rate cuts and more property-focused assistance to come.
"If policy measures continue to be unveiled in the coming weeks, the market narrative may shift from 'too little, too late,' to a more confident stance as policymakers regain credibility," Marcelli wrote.
She thinks it's a good time to be overweight emerging markets and Chinese stocks, in particular.
