Credit: Relief in China credit amid reassurances

Sentiment improves but risks remain
Chang Wei Liang22 Oct 2021
    Photo credit: Unsplash Photo

    Chinese policymakers have begun to weigh in on Evergrande and property risks. PBoC’s head of financial markets, Zou Lan, spoke last Friday to reassure markets that risks related to Evergrande were “controllable”. The same message of controllable risks was then repeated by PBoC Governor Yi Gang over the weekend, and finally affirmed by Vice Premier Liu He himself this week. Given such rhetoric by the top brass to contain risks, we expect China to begin taking stronger measures to contain turmoil in Chinese real estate credit.


    Two important points were clarified by the PBoC last week. First, it assured that financing support will be provided for project resumption, which solidly affirms that the interests of homebuyers are paramount. This should calm jitters for prospective homebuyers amid Evergrande’s distress, and may provide a boost to property sales that had contracted quite severely in Q3. Greater sales imply a less bumpy deleveraging process for developers, and should support real estate credit. Second, the banks were cited as having misunderstood regulators’ policies on lending, resulting in extreme financial strains as real estate firms and homebuyers had been denied loans. We have identified in last week’s note that a sharp contraction in real estate loans and mortgages this year was the major factor contributing to liquidity stresses amongst developers. Therefore, if banks are being advised by the PBoC to accelerate mortgage and loan disbursals in Q4 as reported, it should lessen liquidity stresses among developers going forward.


    With this slew of reassurances from top officials, Chinese real estate USD credit have rebounded from last Thursday’s lows. Investors are positioning for a policy recalibration, including a relaxation of lending policies and more support measures for property sales. Our China DACS real estate subindex has seen a significant compression of 21bps this week, as many distressed real estate bonds have recovered losses. Despite an improvement in sentiment, we believe credit for the riskiest firms is still likely to remain unfavoured. China may recalibrate its approach, but it is not likely to retreat from disciplining firms that have blindly and excessively expanded their businesses.


    Chang Wei Liang

    Credit & FX Strategist
    [email protected]
    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.

    The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. 

    DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-878-9999. Company Registration No. 196800306E. 

    DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    The information set out in this website ("Information") is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. This Information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation. This Information is published for general circulation only and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person. Visitors accessing this website should always seek advice from an independent financial adviser regarding the suitability of the Information referred to herein (taking into account the specific investment objectives, financial situation and/or particular needs of each person in receipt of the Information) before making any investment and/or any purchase in reliance of the Information. Please refer to the actual research publications for important disclaimers and disclosures, where applicable.