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Chinese property market – Change the approach to increase housing sentiment

• Real estate plays a fundamental role in China’s economy, accounting for 30% of GDP considering sectors both upstream and downstream, and real estate speculation has risen tremendously. As prices continue to rise rapidly, investment and speculation have become a way for common people to accumulate large amounts of wealth. To prevent house prices from continuing to rise, regulators introduced the “houses are for living in, not speculation” policy, with the aim to prevent the speculative behavior. The government has issued strict rules for buyers to purchase a second-home, or even tough terms for first-home mortgages. In terms of real estate developers, they have been prevented from using financial leverage to hoard land by the “Three Red Lines” regulatory requirements.
• With the economy in difficulty that lowered customer’s income, the China property market has faced a tough period  since 2021. Since the beginning of 2022, the real estate giant Evergrande has repeatedly reported failed overdue coupon payments; and when the company first announced it was facing unprecedented difficulties, the Chinese government had to move in to control the spillover effects. For another developer giant – Country Garden – the high land-bank exposure to low-tier cites (where new-home sales declined the most) is the main reason for its overdue coupon payments failure in August 2023.
• As the negative effects of strict regulations on the property market – the economy’s main asset – while other industries have not recovered, the Chinese government has changed its policies to support the market and increase liquidity. The support package focuses on demand-side, which still follows the rules “houses are for living in, not speculation”. Tier-I cities have recorded a recovery in demand, and policymakers have ample room to loosen first-home purchase policies in those cities. Developers who recorded positive sale growth (Yuexiu, COLI) also have high exposure on tier-I and strong tier-II cities.
• For the Vietnamese market, we see some similarities. However, the Vietnamese government has packages to support both buyers and developers, with: 1/Reduction in borrowing rates, 2/ Resolving projects’ legal issue, and 3/Infrastructure development. As the result, the Vietnamese market may bottom out sooner (in late 4Q2023, per our expectation); and major cities (Hanoi, Hochiminh city) will recover first, which is similar to the Chinese market