China’sproperty sector has experienced a rapid deceleration over the past few years,which has not only dragged down economic growth, but also triggered a round ofcredit defaults, particularly in offshore markets. However, we have seen aradical shift in policy since the last quarter of 2022, with the "threearrows" easing worries. Since more developers are expected to announcesuccessful debt structuring plans in the first quarter of 2023, we believe thatthe sector’s debt default risk will be largely mitigated in a favorable policyenvironment.

Moreexciting policy support should come from the demand side. Currently, we believethe market is still holding a cautious view on the property sector, given thestill lackluster sales recovery. According to the latest data published byChina Real Estate Information Corporation (CRIC), the top 100 developers’ salesdropped 42% YoY in 2022. In December 2022 alone, contracted sales of the top100 developers dropped by 30% YoY, wider than the drop of 25% YoY in November2022. We believe that more demand-side stimulus will be rolled out in the nextfew months, with the government’s continuous focus on stabilizing the propertymarket.

Thefirst good news in 2023 came from the implementation of more flexible policy onmortgage rates. We believe this dynamic mechanism for mortgage rates adjustmentis a much stronger gesture from the top regulator that demand-side support forthe property sector will be a normalized trend in 2023.

Allthese measures point to some upside to our baseline projection for propertyinvestment in 2023. Looking ahead into 2023, our base case is that propertyinvestment will rebound to zero growth, which will drag down GDP growth by 0.5percentage points. However, given the recent measures, we see that the upsidebias has become a key risk scenario for our baseline case – we cannot discountthe possibility that a bull case could be achieved this year. Under such ascenario, property investment will accelerate to 4.0% yoy in 2023, which alsoimplies an upside bias to our GDP forecast.

China’sproperty sector has experienced a rapid deceleration over the past few years,which has not only dragged down economic growth, but also triggered a round ofcredit defaults，particularly in offshore markets. The Bloomberg iBoxx index, focusing on high-yieldUS dollar bonds issued by Chinese property firms, slumped by 36% for the wholeyear of 2022. From the peak seen in mid-2021, the index slashed by more than80% when it hit the low in November 2022, reflecting the deep concerns aboutthe outlook for the property sector.

However,we have seen a radical policy shift since the last quarter of 2022, with the"three arrows" easing worries. In November 2022, a slew of supportivepolicies were introduced to further expand funding channels for Chinese developers.Firstly, on 8 November 2022, the National Association of Financial MarketInstitutional Investors extended the bond financing support program for privatedevelopers, with total amount of financial aid at RMB250 bn. After that, on 23November 2022, the People's Bank of China (PBoC) and China Banking andInsurance Regulatory Commission (CBIRC) officially published a 16-point rescueplan to support the healthy and stable development of the property market. Andthen, on 28 November 2022, the government released the "third arrow",reopening the equity financing channels for developers. Furthermore, inDecember 2022, SOE banks received window guidance from the top regulator thatthey will help developers to issue offshore loans with secured onshore assets. Webelieve this round of relaxed policies showed the government’s strongdetermination to provide all-round liquidity support to developers. Since moredevelopers are expected to announce successful debt structuring plans in thefirst quarter of 2023, we believe that the sector’s debt default risk will belargely mitigated in a favorable policy environment.

Supply-sidesupport for China’s property sector will continue in the first quarter of 2023.Stepping into January 2023, media reports on further liquidity support include:1) to provide liquidity support to "systemically important"developers (kind of a whitelist); and 2) to relax the stringent "three redlines" and allow developers to add more leverage. Although there has beenno official confirmation on this news, we believe liquidity support fromauthorities will continue and deepen in the first quarter of 2023.

For theproperty sector, we believe that the top-tier players will receive more supportgoing forward. Media reports on 4 January 2023 indicated that top regulatorsare planning to implement more measures to ease liquidity stress on some"systemically important" developers. Per our understanding, these"systemically important" developers refers to large and qualitydevelopers. According to media reports, there are two criteria for thesetop-tier developers: 1) no unqualified audit review; and 2) no record ofpublicly issued debt defaults. We view this as the establishment of awhitelist, which shows that top-tier developers will receive more support goingforward and implies that industry consolidation will accelerate in 2023 and thefollowing years.

Moreexciting policy support should come from the demand side. Although liquiditycondition of developers has largely improved, we believe the market still holdsa cautious view on the property sector, given the still lackluster salesrecovery. In December 2022, developers’ contracted sales remained soft, and themarket needs to see more demand-side loosening policies before turning morecomfortable. According to the latest data published by CRIC, sales of the top100 developers dropped 42% YoY in 2022. In December 2022 alone, the top 100developers’ contracted sales dropped by 30% YoY, wider than the drop of 25% YoYin November 2022. We believe that more demand-side stimulus will be rolled outin the next few months, with the government’s continuous focus on stabilizingthe property market. Currently, the easing direction of demand-side policy isstill at the local level (e.g. adjusting mortgage rates, loosening thedefinition of "second home"). However, we expect more excitingnationwide loosening on the way.

Thefirst good news in 2023 came from the implementation of a more flexible policyon mortgage rates. On 5 January 2023, the PBoC and CBIRC jointly announced theestablishment of a dynamic adjustment mechanism for mortgage rates forfirst-time home buyers. Under the policy, the floor on mortgage rates can varyamong different cities, based on the dynamic changes of local housing prices.To be specific, for those cities with ASP of new homes falling month-on-monthand year-on-year for three consecutive months, local governments can decide toreduce, maintain, or remove the floor on mortgage rates. We believe thisdynamic mechanism for mortgage rates adjustment is a much stronger gesture fromthe top regulator that demand-side support for the property sector will be anormalized trend in 2023. According to the 70-city ASP data from the NationalBureau of Statistics (NBS) (during Sep. 2022-Nov. 2022), there are total 38cities that could reduce mortgage rates, due to declining housing ASP. Most ofthese cities are lower-tier cities. Tianjin, Xiamen, Fuzhou, Zhengzhou andWuhan are the key tier-2 cities, which can implement the new policyimmediately.

Allthese measures point to some upside to our baseline projection for propertyinvestment in 2023. From January to November 2022, property investment declinedby 9.8% YoY, due to the slump in property new-starts and lackluster landtransactions. Looking ahead into 2023, our base case is that propertyinvestment will rebound to zero growth, which will drag down GDP growth by 0.5percentage points. However, given recent measures, we see that the upside biashas become a key risk scenario for our baseline case – we cannot discount thepossibility that a bull case could be achieved this year. Under such scenario,property investment will accelerate to 4.0% yoy in 2023, which also implies anupside bias to our GDP forecast.

Overall,the sales rebound may not be strong in 2023, as weak sales may linger for a fewmonths due to the Covid outbreak. In our view, Covid will delay the effect ofdemand-side stimulus, and property sales may not recover until late secondquarter of 2023. Based on our ground check, most developers have not seengrowth in visitor traffic at their sales centers in the past few weeks, despiteeasing of Covid restrictions. We believe that the uncertainty from the Covidimpact will be a key factor when sales recovery takes place in 2023.

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