China’s double pivot — A major shift in China’s COVID and property sector policies

China recently announced a raft of policy support measures to ease COVID-19-related curbs, and bolster financing support with a focus on the property sector. Here are the key measures that had been announced:

1 Adjustments to COVID-19-related restrictions

On November 11, China announced 20 measures to fine-tune its zero-COVID policy.¹ The seven-member Standing Committee of the Politburo of the Chinese Communist Party, China’s top decision-making body, held a meeting to discuss measures aimed at improving the country’s COVID-19 controls.

Key announcements included:

• A shortening of the requirement for close contacts (of those who had been infected) and inbound travelers to five days of quarantine at a centralized location, followed by three days of home monitoring. This replaces seven days of quarantine and three days of home monitoring.
• A suspension of the "circuit breaking” mechanism for inbound flights.
• Restrictions on the number of PCR tests required per day.
• Local officials will be held accountable for unnecessary control measures, such as suspending face-to-face classes, halting work and production, implementing traffic controls, and introducing arbitrary lockdowns.

While the default dynamic COVID-zero policy remains essentially unchanged, the Standing Committee asked the government to fine-tune its approach to COVID-control policies in a more “scientific and precise” way.²

2 Financing support for the property sector

On November 9, the National Association of Financial Market Institutional Investors, together with the People’s Bank of China (PBoC), announced that a 250 billion yuan (RMB) funding facility (“the second arrow”) would provide support for private corporate-bond financing.³ This includes the purchase of property developer bonds in both the primary and secondary markets. The RMB250 billion package, which can be increased if required, equates to roughly one-third of all private developers’ outstanding onshore and offshore bonds maturing in the next 12 months. In total, property sector bailouts have added up to about RMB600 billion, which is close to meeting the short-term liquidity needs of the sector.

On November 21, the PBoC announced plans to issue RMB200 billion interest-free relending loans to six commercial banks through March 31, 2023, to help ensure delivery of unfinished property projects.

Also, on November 23, the PBoC and China Banking and Insurance Regulatory Commission (CBIRC) officially issued a notice with 16 measures that seeks to provide support financing for the property sector.⁴ The measures will focus on developer loans, with the goal of promoting stability and the healthy development of the housing sector. In contrast to previous piecemeal announcements, the latest measures take a more comprehensive and concerted approach to addressing the financing needs of developers—the policies include guaranteed bond issuance, developer loans, trust loans, mortgages, and acquisition loans.

Regulators also called on financial institutions to support the extension of maturity dates for developer and trust loans. For loans that are due in the next six months, lenders have been asked to extend the repayment period by a year, while bond issuers and bondholders have been encouraged to reach agreements on repayment and loan extensions before the bonds mature. At the same time, banks are encouraged to assume control of any high-quality developers’ problem projects through acquisition loans. National and local asset management companies have also been asked to collaborate with developers and banks to accelerate asset disposals.

A more constructive outlook of China’s property sector

In our opinion, the recently announced zero-COVID fine-tuning (the 20 measures) and financing programs for property sector developers (the “16 measures” and “the second arrow”) support our base-case expectations for 2023: We expect further economic reopening after March, and believe that property sales and investment could hit a bottom, and stronger domestic demand will support GDP growth throughout 2023.

The fine-tuning of China’s zero-COVID policy is positive as it signals an eventual economic reopening. While we’ve observed early signs that some of these measures have been implemented in a limited number of cities, the timing and extent of reopening will ultimately depend on COVID-19 case numbers through the winter months. In the near term, a rebound in the macro economy will likely be limited as overall COVID-19 control policies remain strict. Meanwhile, we already see a rise in infections, with daily numbers breaching 20,000 for the first time since May, although most are without symptoms.

We view the announced 16 measures, the second arrow policies, and the RMB200 billion relending loan plan as positive. They should ease the onshore debt refinancing risk of Chinese developers, particularly among the privately owned enterprises (POEs). That said, we note that policymakers are focusing on safeguarding onshore stakeholders, including onshore bondholders, homebuyers, and the banking system. Offshore bondholders will benefit indirectly from POEs having lower onshore refinancing risk, including bond and bank lending. Nevertheless, these measures can help the sector find a bottom over the next 12 to 18 months. To see a sustained recovery in China’s real estate sector, we will closely monitor the effective implementation of the announced measures and any recovery in physical market sales.

Overall, we view the latest policy announcements positively as they should pave the way for economic reopening and an eventual recovery in the property sector from the second quarter of next year. That said, near-term market volatility should remain high as economic activity is expected to stay subpar for another few quarters.

Stay disciplined amid increasing policy support

In the lead-up to these policy pivots, the China bond team closely monitored developments that could lead to a more constructive tone in China credit. This included prospects for the so-called reopening trade and the all-in-policy bazooka to support China’s economic recovery.

While we may not be there yet in terms of an all-out effort by the government to boost economic growth, we view the latest developments as a significant and favorable shift in policy for China credit. To date, investors might have taken advantage of the market rally to trade and rebalance property exposure across their portfolios tactically. Looking ahead to the year's end, we believe remaining disciplined and maintaining credit beta at around current levels would be rewarding; however, as we gain more conviction around China’s economic recovery, investors may want to seek opportunities to add risk.

We continue to take a disciplined approach to our property exposure. We see increasing policy support as constructive for China property and the broader China credit universe, given the improved prospects for economic recovery as we enter 2023. Following the steep declines experienced by property sector bonds in 2022, valuations are now attractive for those developers explicitly backstopped by government funding support. As sentiment toward the sector continues to improve, we would expect asymmetric upside potential for the performance of our China bond strategies over the next few quarters.

Conclusion

In our view, the latest developments indicate a significant shift in policy direction, which could potentially be favorable toward China’s credit market. Despite this, we remain disciplined in our approach to the asset class going into year end, until China’s economic recovery is more visible. For actively managed China bond strategies, we expect to see more upside than downside potential over the next few quarters.

1 Bloomberg, November 11, 2022. 2 China Daily, November 15, 2022. 3 Global Times, November 9, 2022. 4 CBIRC, November 23, 2022.