China is trying to end its ‘epic’ property crisis. The hard work is just beginning

Analysis by Laura He, CNN

Hong Kong (CNN) — Beijing has launched its most ambitious plan yet to rescue its property market, a development that investors have eagerly anticipated for months. But it’s far from certain that the measures will work.

The package is centered around Beijing’s adoption of a policy that has already been tested in a major city — asking local governments to buy unsold homes from developers and convert them into social affordable housing. It also features a reduction in mortgage interest rates and downpayment ratios, and more importantly, 300 billion yuan ($41.5 billion) in cheap central bank cash to fund state purchases of unsold properties.

The announcement last week swiftly followed an April meeting of the Politburo, China’s top ruling body, indicating that stabilizing the property sector has become a top priority for Beijing as it tries to revive growth in the world’s second biggest economy.

“The policymakers recognize the urgency to prevent an outright property crisis,” said Zhaopeng Xing, senior China strategist at ANZ Research. “The new rescue plan demonstrates the policymakers’ resolution to turn things around.”

While the urgency is welcome, experts say the current package may be far too small in scale to be effective and could suffer problems with funding.

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

To reduce the supply of housing to levels last seen in 2018, the year the real estate boom peaked, may require more than 7 trillion yuan ($967 billion) for all cities, the Goldman analysts wrote in a Monday research note. That’s more than 20 times the amount of funding announced by the People’s Bank of China (PBOC).

Even though China’s economy expanded faster than expected at the start of this year, growth is being weighed down by the all-important real estate sector, which once accounted for as much as 30% of economic activity.

Not enough?

Despite the flurry of announcements last week, it’s still unclear exactly how the government purchases will be implemented and how much is needed to fund the buying. Most importantly, there is lack of clarity on where cash-strapped local governments can get the money to pay for it.

On Friday, Tao Ling, deputy governor of the PBOC, said the relending program could eventually underpin 500 billion yuan ($69 billion) worth of bank loans to support the buying.

But even this figure is much less than what could be needed. Some analysts estimate that hundreds of billions of dollars might be necessary to clear the backlog of millions of empty or unfinished homes across the country.

Ting Lu, chief China economist at Nomura, who has called the country’s housing problem “epic,” says just finishing construction of pre-sold homes would require at least 3.2 trillion yuan ($442 billion). He estimated that there are currently 20 million pre-sold homes that remain unbuilt.

Helen Qiao, chief economist for Greater China at Bank of America, said the funding size of a maximum of 500 billion yuan was “rather underwhelming.”

Without further expansion, the plan was unlikely to make a “notable difference” to the inventory of empty or unfinished homes, she added.

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.

The Housing Ministry said Friday that local governments can instruct local state-owned enterprises to help purchase some unsold homes from developers. But local government financing vehicles (LGFV), which are already carrying a huge amount of “hidden” debt, are not allowed to make the purchases, according to Tao from PBOC.

That leaves fewer options for local authorities to find the cash.

Chinese cities have already racked up about $15 trillion in debt, much of it hidden, having borrowed heavily in recent years to cover the cost of pandemic-related spending and infrastructure projects.

The housing market slump has exacerbated their financial woes, as land sales typically account for more than 40% of local government revenue.

The debt distress has forced many Chinese cities to slash spending, including suspending basic services, such as heating people’s homes in winter.

“It’s debatable whether it’s a good idea to put more debt on already highly-leveraged local governments,” Jing Liu and Taylor Wang, China economists for HSBC, said in a note on Monday.

China’s property industry began to cool in 2019 and fell into a deep trough about three years ago after a government-led clampdown on developers’ borrowing.

Policy rescue efforts started as early as 2022, when the slump triggered crises at some developers and sparked protests by tens of thousands of homebuyers in response to delayed or stalled projects.

But the measures have been largely ineffective, resulting in a deterioration of cash flow among developers. The most recent saga at Vanke, a major real estate company, suggests every developer is at risk, Xing said.

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 first step involves bailing out developers and helping them complete pre-sold but unfinished homes, which is what the new measures are intended to tackle.

“This is important for maintaining overall social stability and stemming further declines in new home sales,” they said.

But the second and third steps involve boosting housing demand and mitigating the contraction in property construction, they said. That requires more detailed measures to revive consumer confidence and boost housing prices.

Making matters worse, the external environment has become increasingly difficult.

Last week, the US government announced new tariffs on China, which could be followed by similar action by the European Union. Former President Donald Trump has threatened to go even further by slapping 60% tariffs on imports from China if he is re-elected.

Xing estimated that Trump’s proposed tariffs could cut China’s growth rate by as much as 0.9%.

“The rescue is not a game-changer for low-tier cities’ housing, which will likely remain depressed,” Michelle Lam and Wei Yao, China economists at Société Générale, said in a research note on Monday.

They also think the rescue plan needs to be expanded, with more detailed policies to be announced. But what matters the most is that Beijing has taken the bold initiative, which will help stabilize expectations.

Taking a long-term perspective, the plan could reduce the risk of China sliding into a “deflationary spiral” like Japan did, as a key lesson from there is that policy makers should avoid doing too little, too late, they said.

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

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