As expected by the market, the loan prime rate (LPR) in China, which is the benchmark for financial credit, was lowered on January 20, with the one-year LPR reduced by 0.1 percentage point to 3.7%, with the 5-year LPR reduced by 0.05 percentage points to 4.60%. This is also the second time that interest rates have been cut at the same time in 21 months. Before that, the LPR was cut by 0.05 percentage points alone last December. The LPR downgrade is also a response to the continuation of the policy effect after the central bank adjusted policy interest rates, indicating that the monetary policy of “moderate easing” continues to work.
The reduction in market interest rates, especially the reduction in the 5-year LPR for long-term investment, is undoubtedly a positive factor for long-term credit businesses such as real estate development credit and real estate home purchase credit, which will also have a positive impact on the sector’s investment and sales. If we consider a series of policy relaxation for the real estate market since November last year, the real estate market expectations appear to be optimistic, and the related stock prices have increased significantly, with the belief that the real estate market will see a turnaround or even a rebound. However, in the view of ANBOUND researchers, the prospect of the real estate market is not exact as cheerful as one might have expected, and the current policy adjustment is to prop up the market to avoid the continuous decline of the real estate market from affecting economic stability. When the long-term trend changes and the existing market continues to be liquidated, the relevant policy relaxation is not truly “flexible”.
In terms of LPR adjustment comparison, the 1-year LPR has been adjusted twice in a row since December last year, with a cumulative decrease of 0.15 percentage points, while the 5-year LPR has been adjusted only once, by 0.05 percentage points. In particular, its adjustment is also lower than that of China’s central bank’s MLF rate (0.1 percentage point). This differential adjustment reflects that the central bank is still concerned about the adjustment of long-term market interest rates, and the reduction of market interest rates is mainly targeted at short-term liquidity needs, while the long-term financing needs of the market are still reserved in policy. This subtle attitude shows that on the one hand, the central bank does not want the rapid downturn in the real estate market to cause risk to spread, nor does it want it to “rebound” too quickly and continue to blow up the bubble. From this point of view, the general tone of the policy of “no speculation in housing” has not changed.
On the other hand, although from a policy point of view, the mergers and acquisitions (M&A) in the real estate market are encouraged, and even proposed that the relevant financing activities are not restricted by the “three red lines”, i.e., the regulatory guidelines relating to the ratio of debt to cash, equity, and assets. That said, this is still the integration of the market itself and the reorganization of the market pattern, not an expansion of the whole market. In this case, some companies that are at risk still have to liquidate their projects and assets. Evergrande, which is mired in a debt crisis, has frequently changed hands in its projects nationwide for more than a month, according to the news from Guangdong. For example, Jiangsu Xuzhou, Yantai in Shandong, Kunming in Yunnan, Shaoyang in Hunan, Foshan in Guangdong and other places all have projects under construction or in the management of the project for sale. Most of the receiving parties are central enterprises and local state-owned enterprises, including many cultural and tourism complexes with a total investment of more than RMB 100 billion. In this regard, it seems that the real estate market is still in the process of consolidation and liquidation, and it is difficult to say if it will reach the “bottom” before the end of this process.
It should be reminded that the easing of real estate credit policy since the starting of this year is related to the credit lines of banks this year. With the “three red lines” and credit limit constraints still in place, the real estate market will still face periodic changes in demand. Therefore, for the real estate market, the real test is in the second half of the year in the fourth quarter. After the bank quota is exhausted, real estate companies still need to reply on their own liquidity to achieve a smooth “cross-cycle”. Otherwise, liquidity risk will still phase out. Another hidden danger is that the change in the external monetary environment brought about the by tightening of the Federal Reserve policy may lead to a rebound in interest rates in China’s domestic market. Not only will the country’s domestic financial market be affected, the real estate market will also be facing the challenges. It also means that the real estate market still needs to be deleveraged and contracted rather than leveraged expansion this year.
In terms of long-term policies for the real estate market, China’s Ministry of Housing and Construction has once again emphasized strengthening the regulation of the real estate market. It proposed adhering to the positioning that houses are for living in, not speculation; not to use real estate as a tool and means to stimulate the economy in the short term; to maintain the continuity and stability of regulation and control policies; to enhance the coordination and accuracy of regulation and control policies; continue to steadily implement the long-term mechanism of real estate, resolutely and effectively deal with the risk of late delivery of real estate projects of individual real estate enterprises, and continue to improve and standardize the order of the real estate market. Central bank officials also said that with the joint efforts of all parties, the recent real estate sales, land purchase, and financing have gradually returned to normal, and the market is expected to improve steadily. The People’s Bank of China will adhere to the positioning that houses are used for living in and not for speculation; fully implement the long-term mechanism of real estate in accordance with the requirements of exploring new development models; maintain the continuity, consistency and stability of real estate financial policies; properly implement a good prudent management system for real estate finance; increase financial support for housing leasing; promote the virtuous cycle and healthy development of the real estate industry.
It can be seen that although the real estate market policy is sometimes relaxed recently, it is still mainly “stable” in the long run. In the case of the change of the demographic issues and urbanization development underlying real estate development, the long-term trend of the real estate market will also change from rapid expansion to stable development. The policy for the real estate market is then shifting from short-term suppression to long-term restraint, and will continue to promote market integration so as to achieve stability in the short-term. At the same time, it continues to divest the financial investment properties of real estate and increase the supply of public goods in the long-term, in order to establish a new development model and achieve a virtuous cycle in the real estate sector.
Final analysis conclusion
The differential downward adjustment of LPR, although having a positive effect on the stability of China’s real estate market, does not mean to have a change in the overall constraint policy. The real estate market is still under pressure from policies and market, and it remains difficult for it to restore the “resilience” of rapid development.
ANBOUND
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