The Chinese Communist Party (CCP) introduced what it called “heavyweight” measures on Friday (May 17) in an attempt to reverse the real estate industry, including highlighting the protection of home buyers, acquiring existing houses in stock, reducing down payment requirements for loans, and canceling the lower limits on interest rates for first and second home loans. However, experts are skeptical of the rescue measures as they lack crucial details and the effectiveness is not optimistic.
Economists have been urging Beijing to implement strong measures to boost the economy, but the policies in the past two years have had minimal effect. This is related to the ideological preferences of the CCP leadership.
Many economists argue that the Chinese economy fundamentally needs market relief, taking more actions to help real estate developers restructure debts and complete unfinished projects, while boosting the confidence of homebuyers through direct subsidies.
However, the CCP leadership has been reluctant to introduce such measures. The Wall Street Journal reported in 2023 that to some extent, this reluctance stems from the leadership’s preference for a tightening ideology.
The policies officially announced by the CCP on Friday can be summarized into three main parts: demand, with the minimum down payment ratio lowered to 15% for first-time buyers and 25% for second homes, canceling the lower limits on interest rate policies for first and second home loans, and reducing housing provident fund loan rates by 0.25 percentage points.
The second part focuses on supply, including supporting the clearance of real estate land and stabilizing financing to directly improve liquidity for property developers.
The third part involves the addition of 300 billion yuan for the refinancing of affordable housing to support state-owned enterprises in acquiring existing housing stock. Additionally, land recovery for affordable housing projects can be supported through special bonds and further efforts to support real estate developers on the “financing whitelist.”
However, even with the CCP being forced to intervene on Friday to rescue the real estate market, the proposed additional 300 billion yuan for affordable housing refinancing is at best a drop in the bucket for relief efforts.
According to the research report by Mainland China Shenwan Hongyuan Securities Institute’s macro team, since 2021, the total area of presold but unfinished houses in China has exceeded 2 billion square meters. Even after excluding underestimations caused by “statistical factors,” there are still over 1.5 billion square meters of presold but unfinished houses.
Even if we take into account the CCP’s goal of “ensuring the delivery of 3.5 million units,” assuming an average size of 100 square meters per unit, by 2023, only 350 million square meters of presold houses would have been delivered, leaving a significant number of real estate projects outside this list still unfinished.
The report predicts that the current required investment scale for ensuring house deliveries is 7.6 trillion yuan, with a funding gap of around 3 to 4 trillion yuan.
Goldman Sachs also estimates that by the end of 2023, China’s available housing inventory amounts to 13.5 trillion yuan, and due to unfinished constructions, an additional investment of 5 trillion yuan is needed to complete them.
Compared to the funding gap, the 300 billion yuan in refinancing for affordable housing announced by the central bank of the CCP can only address a small portion of the capital needed to address the mismatch in housing supply and demand.
Bloomberg stated that it is currently unclear whether the relief measures introduced by the authorities for the real estate market will achieve the expected goals.
The report quoted Shanghai Advanced Institute of Finance professor Zhu Ning, who said, “This is somewhat akin to financial institution relief during a financial crisis.” “Ultimately, it will require central government intervention to extend their credit to the real estate market, or else it will be challenging to believe we have overcome the difficulties or it is premature.”
Additionally, many potential homebuyers are still waiting and observing, anticipating further price drops.
Since the beginning of 2024, the trend of declining housing prices in China has not stopped, with the latest data showing a 10% drop this year.
Official data released on Friday showed that in the first four months of 2024, real estate investment in China dropped by 9.8%, a larger decline compared to the 9.5% in the first quarter.
New home sales volume from January to April dropped by 28.3%, with a 27.6% decline from January to March. Reuters reported that in April, new home prices continued to fall for the tenth consecutive month by 0.6%, the largest decline since November 2014.
Larry Hu, Chief China Economist at Macquarie Group, stated in a research report that the 300 billion yuan initiative to purchase unsold homes sent a “positive” signal to the industry but lacks key details, such as the amount of financing.
Looking forward, the key lies in when and to what extent the central government will provide financial sources. “To evaluate the impact, the key issue is who will provide the funding for purchases and how much they will ultimately provide,” he wrote.
In recent years, Chinese local governments have accumulated debts totaling 108 trillion yuan, mostly hidden, due to borrowing to cover pandemic-related expenditures and infrastructure project costs.
According to Reuters, Yang Yutong, Chief Economist for Greater China at ANZ Bank, said, “How all local governments have the financial muscle to fulfill the tasks of the central government remains an unresolved issue.”
BCA Research’s Chief Emerging Markets/China Strategist Arthur Budaghyan noted that injecting more funds – at least 5 trillion yuan – into the distressed Chinese real estate is needed to have a meaningful impact on the broader economy.
He emphasized the importance of spending this money swiftly rather than over the next three to five years. “The question is how much, when, and how fast,” he said.
Many economists believe that the key to stimulating the Chinese economy lies in whether consumers can confidently purchase homes.
Carlos Casanova, Senior Asia Economist at Union Bank of Hong Kong, stated that the government’s practice of buying unsold homes will not lead to an immediate recovery of the Chinese real estate market.
Tsinghua University’s Zhu Ning told CNBC, “Unless potential homebuyers perceive significant changes in housing prices, current prices are still too high compared to household incomes or rental yields.”
Shen Meng, Director at Beijing-based investment bank Chanson&Co., noted in an interview with Bloomberg that the effectiveness of the CCP’s market stimulus will depend on whether consumers feel confident.
How many vacant houses are there in China exactly? Joerg Wuttke, former President of the European Union Chamber of Commerce in China, stated in a February interview with CBS’s “60 Minutes” that enough empty apartments exist in China to accommodate the entire population of Germany, ranging from 80 to 90 million units, which are unfinished (referring to presold houses that are still under construction).
Compared to Western countries, especially the rapid rebound seen in the US after the COVID pandemic, why hasn’t something similar happened in China?
“I think the pandemic has overshadowed some long-term issues that China has been accumulating. For example, in the real estate sector,” Wuttke said.
As one of the most influential foreign business leaders in China, Wuttke often provides advice to senior EU political leaders and many CEOs of companies operating in China. Unexpectedly caught in the power struggles of the CCP, this top European businessman has decided to leave China.