News Alert: How does the state rescue plan looks like? A perspective of approaches taken by Zhengzhou Government
- Local news media Cailianshe reported that Zhengzhou Municipal Bureau of Housing recently held a meeting with eight developers on four potential channels to dispose their unfinished projects. This takes into account funding offered by the local government and other approaches proposed by the government to revive the physical market. Also, FT reported that the People’s Bank of China is planning to set up a Rmb1tr rescue fund to provide liquidity to the sector, largely in line with our estimate
- We believe that the initiatives by the Zhengzhou government could provide investors with an angle on how the state rescue plan may look like. In our view, this is the right direction to stabilise homebuyers’ sentiment via providing liquidity to projects with construction funding gap
- However, the implementation and effectiveness of the rescue plan needs to be seen as some of the measures proposed are not totally new and have been advocated since late last year
- With that, we expect SOE and quality developers to benefit from wider implementation of the rescue plan, while since the plan is focusing on delivery, we don’t expect heavy liquidity injection directly to distressed developers. Our sector top picks in this regard are COLI (688 HK), CR Land (1109 HK), COGO (81 HK), and Yuexiu (123 HK)
What’s new
Local news media Cailianshe reported that Zhengzhou Municipal Bureau of Housing recently held a meeting with eight developers on four potential channels to dispose their unfinished projects. This takes into account funding offered by the local government and other approaches proposed by the government to revive the physical market. Also, FT reported that the People’s Bank of China is planning to set up a Rmb1tr rescue fund to provide liquidity to the sector, largely in line with our estimate.
Four channels to dispose unfinished projects:
1. Shantytown Renovation Program – platform companies will acquire both existing unfinished and new projects with funding from policy bank – China Development Bank (in line with previous reports by REDD and Reuters)
2. M&A – in the event assets exceed liabilities, the government will seek a rescue from SOE developers or financial institutions to take over these projects to solve the liquidity issues
3. Bankruptcy and restructuring – for insolvent projects, the government will help coordinate the procedures of bankruptcy and restructuring with the aim to ensure project delivery
4. Converting to affordable rental housing – for projects with weak sales momentum and funding shortage, the government will help secure special construction funding provided by China Construction Bank (in line with previous reports by REDD and Reuters)
Our view
Rescue plan initiated by the Zhengzhou government could reflect the thinking of national plan. We believe that the initiative by the Zhengzhou government could provide investors with a preview of how the state rescue plan may look like. In our view, this is the right direction to stabilise homebuyers’ sentiment via providing liquidity to projects with construction funding gap. In turn, this could help ease concerns on mortgage payment suspensions and maintain the stability of the banking system.
The implementation and effectiveness of the rescue plan needs to be seen. The market may have doubts on some initiatives like M&A, and these are not totally new and have been advocated since late last year, while progress so far is not ideal. But we tend to believe it is possible for policymakers to step up easing measures to stop the downward spiral. A larger-than-expected rescue fund with support from the policy bank and large scale shantytown redevelopment projects could help to restore confidence of both investors and homebuyers. However, there are still uncertainties like how to price those projects put up for sale and how will that help distressed developers to recoup sufficient funding for their debt repayment and restructuring.
Steps to stabilise homebuyer sentiment remains critical for physical market recovery and prevent systemic risk. With that, we expect SOE and quality developers to benefit from wider implementation of the rescue plan. Since the plan is focusing on delivery, we don’t expect heavy liquidity injection directly to distressed developers. Our sector top picks in this regard are COLI (688 HK), CR Land (1109 HK), COGO (81 HK), and Yuexiu (123 HK).
