China's Ongoing Battle to Resolve the Property Crisis: The Journey Ahead

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Beijing has unveiled its most ambitious effort yet to revive its property market, a move that investors have been eagerly waiting for. However, the effectiveness of these measures remains uncertain.

Beijing has introduced a new package focused on addressing housing issues by implementing a policy tested in a major city. This policy involves local governments purchasing unsold homes from developers and transforming them into affordable social housing. Additionally, the package includes measures such as reduced mortgage interest rates and downpayment ratios. Moreover, there is also a significant allocation of 300 billion yuan ($41.5 billion) in cheap central bank funds to support state acquisitions of unsold properties.

The recent announcement follows a meeting of the Politburo in April, which is China's top ruling body. This swift response indicates that stabilizing the property sector has now become a top priority for Beijing. This shift in focus reflects Beijing's efforts to stimulate growth in the world's second-largest economy.

Policymakers are aware of the need to avoid a property crisis, as stated by Zhaopeng Xing, senior China strategist at ANZ Research. The recently announced rescue plan reflects their determination to address the situation.

Although the sense of urgency is appreciated, experts believe that the current plan may not be sufficient in size to have a significant impact and could face challenges with funding.

An Evergrande residential development in the Chinese city of Nanjing

An Evergrande residential development in the Chinese city of Nanjing

AFP/Getty Images

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Beijing has accused Evergrande of the biggest fraud in Chinese history, alleging that the company inflated its revenues by $78 billion.

Goldman Sachs reports that the total value of unsold homes, unfinished projects, and unused land in China amounts to about 30 trillion yuan ($4.1 trillion).

To bring housing supply back to 2018 levels when the real estate market was booming, Goldman analysts suggest that cities may need over 7 trillion yuan ($967 billion). This amount is more than 20 times the funding announced by the People's Bank of China (PBOC).

Despite China's economy growing faster than expected at the beginning of the year, the real estate sector, which used to make up 30% of economic activity, is now holding back overall growth.

Despite all the recent announcements, it is still uncertain how the government plans to carry out the purchases and the amount required for funding remains unclear. The most pressing issue is the lack of information on how financially struggling local governments will be able to afford it.

Tao Ling, the deputy governor of the PBOC, mentioned on Friday that the relending program could potentially support 500 billion yuan ($69 billion) in bank loans for purchasing.

However, some analysts believe that even this amount may not be enough. They estimate that hundreds of billions of dollars could be required to address the large number of empty or unfinished homes in China.

The Zhongrong International Trust Co. offices in Beijing, China, on Monday, Aug. 14, 2023.

The Zhongrong International Trust Co. offices in Beijing, China, on Monday, Aug. 14, 2023.

Stringer/Bloomberg/Getty Images

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China is facing a potential 'Lehman moment' as a major investment firm fails to make payments. Ting Lu, chief China economist at Nomura, has described the country's housing issue as "epic." He estimates that completing construction of pre-sold homes alone would cost at least 3.2 trillion yuan ($442 billion). Currently, there are around 20 million pre-sold homes that have yet to be built.

Helen Qiao, who is the chief economist for Greater China at Bank of America, expressed her opinion that the funding size of up to 500 billion yuan was not very impressive.

She mentioned that without more expansion, the plan was not likely to have a significant impact on the inventory of empty or unfinished homes.

Where is the money?

It’s also unclear where indebted local governments can get the funding, beyond the relatively small amounts the PBOC is channeling via state banks.

Local governments have the option to direct local state-owned enterprises to buy unsold homes from developers, as announced by the Housing Ministry on Friday. However, it is important to note that local government financing vehicles (LGFV) are prohibited from participating in these purchases due to their existing high levels of undisclosed debt, as mentioned by Tao from PBOC. This restriction limits the available funding sources for local authorities.

Chinese cities have accumulated approximately $15 trillion in debt, with a significant portion being undisclosed. This debt was acquired through heavy borrowing in response to pandemic-related expenses and infrastructure developments.

A man cooks noodles on a street in Shanghai, China May 27, 2023. REUTERS/Aly Song

A man cooks noodles on a street in Shanghai, China May 27, 2023. REUTERS/Aly Song

Aly Song/Reuters/FILE

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The financial difficulties of Chinese cities have worsened due to the housing market downturn, with land sales usually making up over 40% of local government income.

As a result of their debt troubles, many cities in China have been forced to cut back on spending, leading to the suspension of essential services like heating homes during the winter.

Jing Liu and Taylor Wang, China economists for HSBC, raised concerns about adding more debt to local governments that are already heavily leveraged in a note on Monday.

China's property market started to slow down in 2019 and faced significant challenges around three years ago due to government restrictions on developers' borrowing.

Policy rescue efforts began in 2022 due to the economic downturn causing problems for developers and leading to protests from homebuyers facing delays in their projects. However, these efforts have not been very successful, causing a decline in cash flow for developers. The recent issues at Vanke, a prominent real estate company, highlight the vulnerability of all developers, according to Xing.

Just the beginning

Addressing the oversupply of unsold homes is only the first step, experts say. Broadly speaking, the government needs to tackle three problems, according to Goldman analysts.

The new measures aim to help developers by bailing them out and assisting in completing pre-sold but unfinished homes. This is crucial for maintaining social stability and preventing further decreases in new home sales.

Aerial photo shows commercial residential buildings in Nanjing, East China's Jiangsu province, May 17, 2024.

Aerial photo shows commercial residential buildings in Nanjing, East China's Jiangsu province, May 17, 2024.

CFOTO/Future Publishing/Getty Images

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China has introduced a significant rescue plan for the struggling property sector, especially as home prices continue to decline. Experts have pointed out the importance of boosting housing demand and addressing the decline in property construction. This will involve implementing specific measures to restore consumer confidence and increase housing prices.

The external environment has become more challenging, adding to the existing difficulties.

The US government recently imposed new tariffs on China, with the possibility of the European Union taking similar actions. Additionally, former President Donald Trump has threatened to increase tariffs on imports from China by 60% if he wins re-election.

Xing predicted that Trump's suggested tariffs could reduce China's growth rate by up to 0.9%.

According to a research note by China economists Michelle Lam and Wei Yao from Société Générale, the rescue plan is not expected to significantly impact the housing market in low-tier cities, which is likely to continue to be sluggish.

They believe that the rescue plan should be expanded and more detailed policies should be announced. What is most important is that Beijing has taken a bold initiative, which will help stabilize expectations.

Looking at the long-term impact, the plan could lower the risk of China experiencing a "deflationary spiral" similar to what happened in Japan. A key lesson learned is that policymakers should avoid taking too little action too late.

“[This might be] the beginning of the end of China’s housing crisis,” they added.

Editor's P/S:

The Chinese government's efforts to revive the struggling property market are a testament to the importance of this sector to the country's economy. The measures announced, including purchasing unsold homes from developers and providing financial support, are aimed at addressing the oversupply of unsold homes and stimulating demand. However, the effectiveness of these measures remains uncertain, as they may not be sufficient in size and could face funding challenges.

The article highlights the complexity of the situation, with experts expressing concerns about the lack of detailed policies and the need to address the broader issue of declining property construction. The external environment, with its potential for increased tariffs, also poses challenges to the recovery of the housing market. It remains to be seen whether the government's rescue plan will be successful in stabilizing the property sector and preventing a further slowdown in China's economic growth.