Central Bank and Two Other Departments Issue Heavy Statement, Willing to Lend, Withdraw, and Cut Lending to Normally Operating Real Estate Enterprises, Offshore and Onshore Renminbi Strong, What Information is Worth Paying Attention to?

Cost, Clearing, and the Next Crisis

I have no doubt that the central bank can rescue any real estate company, and even revive the real estate industry.

But there is a basic understanding ABC: if there is not enough cost paid/clearing, then the next crisis will come faster and fiercer.

This is not economics, this is human nature.

The Renminbi exchange rate affects the real estate market, and the level of support from financial institutions needs to be monitored.

This is somewhat similar to signing off on a document with a “tentative agreement” or a “proposed agreement.”

Adding “normal operation” before phrases like “refusing to lend, withdrawing loans, cutting off credit” makes the statements increasingly vague.

However, it becomes quite difficult when it comes to conducting business and making decisions.

1 How many real estate companies are currently operating normally?

Private real estate companies are basically on shaky ground, and even Vanke cannot withstand the rapidly falling bond prices. They require a strong statement of support from the Shenzhen State-owned Assets Supervision and Administration Commission to provide a safety net.

What signal does the sharp decline in Vanke bonds release? - Saka’s answer - Zhihu

In extreme cases, Shenzhen’s state-owned assets and state-owned enterprises will come together to support Vanke’s development, providing support through market-oriented and rule-of-law means, in compliance with the law, and helping Vanke maintain its bottom line of not encountering operational risks.

2 The real estate market is already difficult, and there are likely few companies that can operate normally in such conditions.

According to the National Bureau of Statistics website, the national real estate market’s basic situation from January to October 2023 was announced by the National Bureau of Statistics. From January to October, the sales area of commercial housing was 9,257.9 million square meters, a decrease of 7.8% year-on-year, with residential sales area dropping by 6.8%. The sales amount of commercial housing was 9,716.1 billion yuan, a decrease of 4.9%, with residential sales amount decreasing by 3.7%.

In such market conditions, how many developers are taking out loans for normal operation and investment? Many of them may need to borrow new debt to repay old debt or maintain their current pace of development. The support from financial institutions for robbing Peter to pay Paul is likely to be significant.

3 This statement can have a certain impact, but to truly stimulate the real estate market, multiple measures are still needed.

Of course, various departments have recently made collective statements, including local authorities vigorously introducing some relaxation measures on home purchase restrictions. With these combination punches coming in rapid succession, they should be able to have a certain effect.

It is still premature to draw conclusions about whether or not the real estate market can be pulled out of the quagmire.

4 How are real estate-related news and the Renminbi exchange rate related?

Inadequate Financial Regulation

The central bank, financial regulators, and the securities regulatory commission all have more important matters to attend to. They have clearly not been fulfilling their duties, and it is difficult to determine whether their current practices are a case of “making up for lost time” or “trying to put out a fire while clutching at straws.” The main issue at hand is a test of human nature rather than adherence to regulations.

1. Tightening monetary supply during speculative surges

Over the past decade or so, the central bank has consistently failed to match monetary supply with nominal GDP. This means that there has always been an excess of money supply, which results in two possible outcomes for any economy: either inflation, as seen in Europe and the United States in recent years, or an asset bubble - the latter being more common. When our economy experiences overheated speculation in the real estate market, the central bank should play a role in counter-cyclical regulation. However, instead of doing so, they have added fuel to the fire with loose monetary policies since 2014, combined with local restrictions on property purchases and sales, and the suppression of land supply. This missed opportunity to curb asset bubbles has resulted in even more credit flowing into the real estate sector. Therefore, it is not just the outstanding mortgage loans for households or real estate loans for property developers that should be taken into account, but also the considerable amount of bank loans secured by land as collateral. By binding the entire financial system tightly to the real estate market, where major banks only recognize real estate as collateral for loans, not to mention rural banks whose only option is to dig into household savings and debts to profit from their monopoly position.

2. Financial innovation and regulatory oversight

Let’s not even mention the past, but in recent years, there has been a string of financial collapses. The focus should not be solely on the various trust defaults, but rather on the collapse of the real estate pre-sale system. This issue sparked intense debates in 2020, particularly regarding the possibility of mass unfinished housing projects. At that time, the opposing viewpoint was that regulatory funds cannot be used indiscriminately, and besides, construction costs account for a relatively low percentage. The latter is true, but the former, as it appears now, is not reliable. The collapse of the entire special Ponzi credit system is connected to everyone in the chain, but with no direct perpetrators, it has caused a tremendous social tragedy. When everyone shares some level of responsibility, it forms a more stable community of shared interests, where no one takes responsibility. Naturally, someone has to bear the consequences.

3. Borrowing to pay off debts is not a risk mitigation strategy

Over the past three years, one point has been substantially proven: relying solely on morality and human intervention to manage the trillion-dollar credit problem simply doesn’t work. It’s like a bottomless pit. The most ironic situation is debt restructuring, starting from one trillion and turning it into two trillion. The two trillion might become four trillion in the future, and it may not even solve the issue of unfinished housing projects. This assessment of costs and benefits reveals a lack of willingness to rectify the previous model. The result of path dependency is that the distribution of profits remains the same as before. Furthermore, the lack of transparent information means that the public needs to know the progress of the current situation, the assets and liabilities of troubled real estate companies, and the funding gap. This cannot rely solely on internal negotiations but requires social supervision. There is a great deal of uncertainty in this matter, especially considering that the credibility of these individuals is almost non-existent. How do we define normal operations? Is it normal for indebted companies to borrow more to pay off existing debts? Who determines the standard and who provides the loans? There is a significant lack of trust in this regard.

Therefore, the three departments should focus on their respective responsibilities. We need a stable currency, without sacrificing the purchasing power of the general public to fill a gap. We need a sound financial system that identifies and rectifies any flaws. It is not just about future issues but also about protecting the interests of investors in the various investment products and financial markets currently available. Losses from investments are normal, but they should not result from the transfer of assets to an imminent collapse. Insurance claims must also protect the capital pool, and we cannot consistently find that the funds are already gone whenever problems arise.

Relying heavily on printing money, with land and real estate as anchors, and failing to solve problems during a real estate downturn, is unrealistic. Moreover, the inadequate regulation within the financial system has increased the risks. We should not always assume that financial crises happen to others, or that they are distant events. What needs to be done is often about making a choice rather than causing even more harm. It is a fallacy to believe we can have everything we want without considering the consequences.

Avoiding Financial Loss

Set aside the desire to help others and respect the fate of the country.

This magical approach clearly shifts the risk onto banks, making a mess that keeps getting bigger. Ordinary people should be thinking about how to avoid their wealth being taken to fill the bottomless pit of real estate.

Analysis of the Trend of Increasing Zhihu Users

Reposted, unsure of its authenticity.

Hoping that the truth-seeking Zhihu users can discuss and verify it.

I just checked, and there are updates. In the past ten days or so, there has been an increase of around 18,000 people.

Memorable Cake, Do Not Touch

I am currently unable to eat this cake, but that doesn’t mean you can touch it.

Looks like there’s another show to watch, one more time.

The Importance and Role of Policy Documents

I have a personal experience of reading many policies, which requires understanding them from a reverse perspective.

For example, in the previous draft opinion on promoting the development of the private economy, the behaviors that were strictly prohibited and eliminated were exactly the things that private enterprises easily encounter in their daily operations.

Otherwise, there would be no need for a specific document to emphasize them.

In society, there is a characteristic when it comes to handling affairs: if there is no explicit prohibition in the law, it is considered permissible; if a policy document does not clearly state it, then it falls into a gray area.

Therefore, when everyone sees many policy documents being issued, they should not think they are just official documents to go through the motions.

In fact, the truth is that if these documents were not issued, the prohibited behaviors listed in them would continue to exist endlessly.

Taking the recent document issued by three departments of the central bank as an example, it states, “Equal treatment should be given to meet the reasonable financing needs of real estate enterprises of different ownership, and loans should not be hesitated, withdrawn, or cut off for normally operating real estate enterprises.”

In fact, it is not so easy to achieve these two points.

It still requires courage to provide financing to private real estate companies.

And not hesitating to grant loans, not withdrawing loans, not cutting off loans; if you do not hesitate to grant loans and not cut off loans, you have to face the risk of not being able to recover the loan later.

Furthermore, withdrawing loans, which means recalling the loan in advance, is a typical behavior of not helping others in a time of crisis.

When seeing that the lender may encounter problems, you want to escape first, so you ask the lender to repay the loan in advance.

This is similar to a run on the bank.

Everyone wants to be the first to run, but under the panic situation, even those without problems may encounter issues due to the run.

Therefore, as you can see, it is impossible to prohibit the behaviors of hesitating, withdrawing, and cutting off loans.

Only by issuing a document and making it mandatory for everyone to refrain from withdrawing and cutting off loans, can a breathing space be given, avoiding a panic situation and temporarily solving the problem.

So this document is actually useful.

Otherwise, if you see that the yuan exchange rate has risen so much, there must be a reason for it.

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Decline in Real Estate Financial Policies

Adhering to the principle of “two unswerving commitments,” meeting the reasonable financing needs of different types of real estate enterprises with equal treatment, and not hesitating to provide loans, withdraw loans, or cut off credit for real estate enterprises engaged in normal operations.

The excessive use of qualifiers often raises many doubts, such as how to define reasonable financing and what constitutes normal operations. It seems to be too flexible.

Adhering to the principles of the rule of law and marketization, increasing financial support for building delivery, and promoting industry mergers and acquisitions. We must actively serve the construction of affordable housing and other “three major projects,” accelerate the supply-side reform of real estate finance, and promote the construction of a new model for real estate development.

The call to “deliver buildings” has been going on since last year. The most resounding event was on September 6, 2022, when Zhengzhou City responded to the national call and held the “Building Delivery” conference. At this conference, a decision was made to implement the special action plan “Working Hard for 30 Days to Ensure Comprehensive Resumption of Work in All Suspended Projects in the City.” We don’t know how much financial support we have received, but according to the latest statistics from Baijia Construction Network, the average delivery rate of 1,114 “building delivery” projects nationwide in the past year is 34%, with the lowest rate in Henan at 11%.

The call is loud, the demand is fierce, but where are the buildings? As for what is mentioned in the article about the rule of law, just recently in Henan, where documents were specifically formulated for “building delivery,” a couple who bought an unfinished building was assaulted by Sunac during the process of seeking protection of their rights, and their phone was seized and their electricity was cut off and monitored in front of the public:

After the male homeowner was beaten, online videos were taken down and official media remained silent. When everyone buys a house, the government takes the land transfer fee, the bank collects the mortgage interest, and the real estate developer takes the purchase payment. After the project is abandoned, the buyers bear all the risks. In this situation, more and more buyers are starting to see the reality. How many people are willing to pay to be treated as fools?

The fundamental problem of China’s real estate lies in the fact that the record price of new homes requires buyers to pay a premium, and the unique presale system places all the risks on the buyers. Premiums plus high risks, who would want to do such business? Unlike the presale system in Hong Kong, which our country claims to learn from, our previous so-called presale system has its own unique risks. In Hong Kong, presale of properties involves paying a deposit, with buyers making a down payment as a deposit first, and paying off the rest through a mortgage after the property is delivered. If the property is abandoned, buyers bear the risk of losing the down payment at most. In mainland China, presale of properties is like trading futures, where buyers make a down payment as a deposit first, then immediately apply for a mortgage to clear the remaining payment, start paying monthly installments, and wait for the developer to complete the house before completing the transaction. If the regulatory funds are misused, buyers rarely notice. If the property is abandoned, buyers bear all the risks. Even if the property is delivered normally, buyers will generally bear certain quality issues.

Finally, as for the appreciation of offshore and onshore RMB mentioned in the title, the main reason is that the US announced that its October CPI exceeded expectations, coupled with the support of the US economy’s short-term resilience in the labor market, fiscal expansion, and credit support for residents, all of which are showing signs of marginal cooling. People are starting to expect the Federal Reserve to stop rate hikes and start rate cuts by mid-2024. Therefore, US bonds and the US dollar have started to weaken. If you insist on attributing the credit to the so-called central bank’s strong voice, that is definitely up to you.

The Operational Difficulties of Real Estate Companies

The difficulty lies in how to distinguish “normal operations”.

Recently, the real estate companies that have defaulted on their debts, to be honest, were all operating normally.

Longfor, Country Garden, Hengjian, and others, as far as I know, were all operating normally, but unfortunately, they all defaulted.

How can banks determine that these companies are operating normally?

Therefore, the key point here lies in the phrase “normal operations”.

If we follow the standards of defaults, the number of real estate companies that can operate normally now is very few.

So, this is not really a significant announcement, at most it is just a public display of concern.

Banks may also use the reason of abnormal operations by real estate companies to reduce or cut off loans.

It doesn’t have much substantive significance for real estate companies.

Nowadays, banks have an accountability system, and recently, so many financial giants have made mistakes. With such immense pressure and the sound of imminent danger, who dares to lend to real estate companies?

After all, companies are the main players in business, and their performance matters.

If you were the head of a bank, and the new developments of real estate companies couldn’t be sold, and the previous debts were not yet repaid, would you dare to lend?

After Evergrande defaulted, banks and other financial institutions immediately applied for asset preservation.

Several important assets used as collateral were taken back directly.

Now it seems that this behavior was completely correct, as otherwise, banks and financial institutions would suffer even greater losses.

Therefore, in this stage, no bank is really that foolish to not evaluate risks.

It can be foreseen that it will become increasingly difficult for real estate companies to borrow money.

Furthermore, the previous preferential treatment for lending based on the group’s brand credit has become worthless.

Now, if a private enterprise wants to borrow money, it’s very simple—just use land projects as collateral.

If the market value is 800 million, the bank will consider a discount for future devaluation and only provide a loan reference of 640 million.

Only in this way can the bank reduce risks.

Clearly, real estate companies are not happy about this.

Currently, 99% of real estate companies are short of money, and the amount they can borrow depends on whether they have truly valuable projects in hand.

In times of crisis, few are the ones who offer help, while many are those who add insult to injury.