Interbank liquidity tightening during August coincided significantly with the policymakers' introduction of a set of new regulatory measures targeted for property developers. PBOC and the Ministry of Housing and Urban-Rural Development (MOHURD) in mid-Aug had a meeting with major property developers in Beijing on the new rules set to monitor property developers' funding and financing outlook. The new rules include: (1) debt-to-asset ratio must not exceed 70% after contract liabilities; (2) net gearing must not exceed 100%; and (3) Cash-to-short-term debt ratio has to be not less than 1. Developers who fail to meet these requirements are required to submit an action plan by the end of Sep on how to reduce their debt levels within a year and meet all the above three requirements within 3 years.
A significant fall in structured deposits and ordinary deposits since the beginning of the year (chart 1) suggests a lot of money has been poured into the real estate market again. That's reflected in the rapid rise in real estate FAI year-to-date (chart 2). Against this backdrop, policymakers have found it necessary to curb the pace of property developers' re-leveraging before it's too late.
With economic growth having already stabilized since the COVID-19 pandemic became fully under control, this round of tightening may last till the end of the year. Now the policy dial is gradually shifting from accommodative in 1H20 to neutral in 2H20. We do not believe policy makers would like to dial towards significant tightening. However, given the top leaders' bias in favour of financial risk control, we don't think the policymakers are ready to fall back towards easing anytime soon either.
Recall, in the 21 August issue of this publication we said "with PBOC turning increasingly reluctant to ease monetary policy further, we doubt the bond market will re-enter bull trend anytime soon. Instead, we anticipate CGB 10-year yield will be heading upward to retest 3.10% level". After that, 10-year CGB yields kept rising and finally set a year-high of 3.17% on 7 Sep. Despite the downward pullback of the yield in recent days, we still stick with our cautiously bearish view on the bonds. We wouldn't be surprised if the 10-year CGB yield finally reaches 3.25% or higher in Q4 if the prevailing mini-deleveraging cycle continues (chart 3).
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