Morgan Stanley: We Are Approaching An Inflection Point In China Policy Easing | WHAT REALLY HAPPENED X-Frame-Options: DENY X-Frame-Options: SAMEORIGIN

Morgan Stanley: We Are Approaching An Inflection Point In China Policy Easing

The past two months have seen successive waves of headlines from China, first on the broad regulatory reset and then this week’s focus on property developers facing near-term funding pressures. The policy goals of these measures are first to ensure social stability and second to make economic growth more sustainable by reducing income inequality and addressing imbalances and excesses. However, they have raised concerns about a potential rise in systemic risks and a sharper slowdown in growth.

Investors’ focus has shifted from tech to the property sector, which faces challenges on two fronts. First, property developers are required to adhere to the “three red lines” – maintaining healthy liabilities-to-assets, net gearing and cash-to-short-term debt ratios – which were announced in August 2020.

What we are experiencing now is a direct effect of that regulatory action, which aimed to reduce systemic risks with benchmarks to curb excessive property sector borrowing. In addition, property demand in China has slowed in the last two months, as the front-loading of mortgage lending quotas in the first half of the year has weighed on property sales, increasing headwinds for property developers.

As things stand, most property developers are on track to comply with the three red lines, but a number face challenges in meeting the mandated ratios. Our China property analyst estimates that the total debt exposure of property developers is around Rmb 18.4 trillion, which is now similar to annual sales. This indicates that leverage in aggregate is manageable – hence, so is the deleveraging process.

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