Quick Recovery Not Likely for China Real Estate Sector; Reiterate Preference for SOE Developers

China real estate activity has been weak through the first half of 2022, in line with our earlier expectations for the physical market weakness to persist. Despite green shoots of recovery in June, the pace of recovery, however, may be hampered by the start-stop zero-COVID-19 policy that likely limits the positive impact of policy easing. We differ from the market view that easing policies in the form of lower mortgage rates are adequate to support rapid recovery once lockdowns recede. Instead, we believe that healing the developers' access to credit is key to longer-term recovery. We expect any recovery to be slow as we do not expect a quick rebound in homebuyer confidence, and we think homebuyers will be selective. Support from financial institutions for onshore debt backed by derivatives for some developers strikes the liquidity issue at its heart—however, it has not lifted markets. Action in the bond market implies that investors remain concerned with the long-term debt repayment ability of some developers, especially if presales activities remain at a slower pace. Lenders may also be choosy, capping the abilities of some developers to expand.