After three months, the Chinese Communist Party’s market rescue measures, which called for nearly 400 counties and cities to respond, only received a response from 29 cities, and lacked detailed regulations.
Bloomberg Intelligence analyst Kristy Hung mentioned that Beijing is currently struggling to sell its housing assistance plan to local governments because the “meager rental income is hardly worth the risk.”
It is widely believed that the government purchasing housing inventory is a key step in alleviating the housing oversupply, but the funds provided by the People’s Bank of China are not being lent out.
According to reports from official Chinese media, after the People’s Bank of China announced a 300 billion yuan housing refinancing plan in May, over 200 cities were urged to implement the plan. In June, the Ministry of Housing and Urban-Rural Development expanded the plan to county-level, encouraging 387 lower-level counties to participate.
However, after more than three months, only 29 counties and cities responded.
Bloomberg reported that the slow implementation of the market rescue plan is largely due to lack of attractiveness of the plan to local governments economically.
Public data shows that by the end of June, only 12.1 billion yuan out of the 300 billion yuan refinancing plan by the People’s Bank of China was utilized, accounting for 4%; out of the 580 billion yuan refinancing funds, only 8% were deployed.
China currently has 382 million square meters of unsold housing inventory, an area equivalent to that of Detroit in the United States.
According to a report by Ding Zuyu, Chairman of the real estate information platform Shanghai Keizhi Information Technology Co., as of July, the national unsold apartment purchase rate is only 1.9%.
Why are local governments unwilling to take action? The main reason is that local governments predict that the property market has not bottomed out yet, and currently investing in real estate is not profitable, lacking the motivation to move forward. If treated as a political task assignment, local governments may consider negotiating with developers, but the direct result of negotiating prices is a further downturn in local property prices.
According to a report by Jefferies Financial Group Inc., it is predicted that apartment prices in major cities will drop by at least another 30% before stabilizing, making it economically unviable for local Chinese Communist Party officials to purchase properties now.
For local officials, converting inventory into affordable housing is a losing proposition as estimated returns are lower than financing costs. According to Macquarie Group, as of 2023, the average rental yield in first-tier cities in China is only 1.4%, while the central bank’s financing rate is 1.75%.
Facing requests from Beijing, local governments are beginning to cautiously control costs. Some cities have proposed developers to sell houses to the government at half price. Foshan in Guangdong proposed buying at a price not exceeding 50% of prices for similar nearby projects, while Dongguan plans to set the price of unsold affordable housing at around 50% of the new house price.
Tyran Kam, Senior Director of Corporate Ratings at Fitch Ratings Asia Pacific, stated that due to the social and political impact on local homeowners, local governments had to approach this cautiously due to the price reductions.
Since the central government does not provide bottom-line support, including a large amount of real estate in a short period of time by local governments not only hinders further revenue from land sales but also may lead to social problems, causing discontent among existing homeowners.
Local governments have faced financial pressures for a long time, and the budget expenditures of local governments have been declining in the first seven months of this year. Among the 31 provinces and municipalities, only Shanghai achieved a fiscal surplus in the first half of the year.
Bloomberg mentioned that Zerlina Zeng, a senior credit analyst at Creditsights Singapore LLC, said, “Due to the lack of funds, as well as banks and state-owned enterprises needing to assume all credit and investment risks, we expect that the purchasing plan will not be widely implemented.”
The Bloomberg China Major Developers Index fell by 1% on Wednesday, reaching its lowest level since the end of April.