The Chinese real estate market continues to stay sluggish, and the Chinese Communist Party is trying to stimulate consumption by promoting housing upgrades, with initiatives like exchanging old homes for new ones. This effort is also extending to consumer goods like cars and electronics. However, experts analyze that in the current environment where people’s incomes are decreasing and unemployment rates are rising, these measures may not have significant effects. It could even lead to overextending the market’s future consumption capacity, triggering another wave of vicious excess production capacity.
To boost transactions in the new and second-hand housing market, the China Index Research Institute’s monitoring data shows that over 30 cities including Zhengzhou and Shenzhen have expressed support for the “exchange old for new” initiative. This involves real estate companies and brokerage agencies prioritizing the sale of older homes and developers or state-owned platforms acquiring old homes, with the proceeds used to purchase designated new properties.
In the first quarter of this year, China’s national real estate development investment decreased by 9.5% year-on-year, with residential investment dropping by 10.5%.
American economist Huang Dawei told a reporter that the purpose of the exchange old for new initiative is due to the current low state of the real estate market, and it also affects industries like renovations, electronics, furniture, and overall consumption. Authorities hope that by implementing this model, it can lead to a bottoming out and rebound in the real estate sector.
“However, this measure does not fundamentally address the problem. Firstly, the real estate market is related to people’s welfare, with various aspects of security being too low, causing people to be hesitant to spend,” Huang Dawei stated.
“Huang Dawei indicates that the exchange of old for new will not have a significant effect in boosting market economy and real estate transactions.”
He further explains, “Given the reduction in income, high unemployment rates, declining corporate profit margins, and economic stagnation, these are very negative factors.”
Huang Dawei explains, “The exchange old for new does not directly connect to these problems.”
He continues, “The initiative has limited impact on activating the market economy and real estate transactions. Some individuals who were planning to buy a house may take advantage of the situation, but their spending capacity is limited. Overall, it is limited in its ability to stimulate a real recovery in the real estate market.”
National Bureau of Statistics data shows that from January to March, the sales area of newly-built commercial housing was 22.668 million square meters, down by 19.4% year-on-year, with residential sales area dropping by 23.4%. The sales value of newly-built commercial housing was 2.1355 trillion yuan, down by 27.6%, with residential sales value decreasing by 30.7%.
Wang Guochen, a researcher at the China Economic Research Institute, also expressed to the reporter that the initiative to drive real estate purchasing through the exchange old for new scheme may not yield significant results.
He analyzed, “Firstly, people generally do not have the financial means as personal bad debts are at an all-time high; secondly, with current falling housing prices, people anticipate further declines, dampening their immediate purchase interests. Additionally, considering the ongoing closures of developers, people are wary of buying properties with unresolved issues.”
The inclusion of state-owned enterprises into the real estate sector may involve state-owned enterprises providing support or subsidies. Initially, the government intervened, but with financial constraints, banks were brought in. Currently, funds from banks are tied up in problematic developer bonds, leaving central enterprises as possible sources to assist with subsidies.
However, whether the promises of subsidies through the exchange old for new scheme will be effectively implemented remains a point of concern. Reports from different regions such as Zibo and Lin Yi in Shandong, Shangqiu and Xinzheng in Henan highlighted protests by residents who, despite purchasing houses over a year ago, have not received the promised subsidies of around 50,000 RMB.
Housing upgrades are just one part of the Chinese Communist Party’s recent “exchange old for new” initiatives. At a press conference on April 11, various departments, including the National Development and Reform Commission, jointly explained the “action plan for promoting large-scale equipment renewal and upgrading consumer goods through exchange old for new.”
During the meeting, it was revealed that China has over 300 million registered vehicles and more than 3 billion household appliances, demonstrating a vast market potential for upgrades. With the implementation of specific policies, such as the detailed regulations on automobile subsidies for the exchange old for new scheme issued by the Ministry of Commerce and the Ministry of Finance on April 26, the government is actively pursuing measures to promote consumer spending.
Huang Dawei expressed, “In reality, this model is not driven by safety concerns but rather aims to promote excess production in the industry, digesting production capacity, and stimulating domestic demand ideas.”
Since the 2008 financial crisis, China’s economy has been sluggish. In 2008, 2009, and 2010, the Chinese government had already started exchanging old cars and electronics for new ones, and even promoted the use of electronics in rural areas.
“However, this has led to the wastage of societal resources,” Huang Dawei said. “There’s public pressure to criticize those who continue using old vehicles.”
He cited examples from the United States where many cars from the 1950s and 1960s are still in use. Vehicles from two to three decades ago are also common, with the idea that a vehicle must be replaced after just a few years being unsustainable.
“The key issue lies in the current decrease in people’s incomes, rising unemployment rates, declining corporate profits, and the lack of increase in social security,” Huang Dawei emphasized.
He pointed out that with increased taxes and living expenses, people have no extra money for consumption. As a result, citizens are increasingly financially strained. However, when formulating policies, Beijing may only consider general data.
Huang Dawei explained, “This so-called big data calculation, based on the total national bank deposits, deemed accessible funds, and divided by an average, may lead Beijing to believe that people have money and are not spending. However, this overlooks the vast wealth gap in China, with numerous vested interest groups like officials and employees of state-owned enterprises having better social security and income. Some corrupt officials may have billions themselves.”
“A city’s annual consumption may not even match what a corrupt official earns in a year. Nevertheless, when averaged together, Beijing might mistakenly assume that people have money to spend. This is a statistical fallacy,” argued Huang Dawei.
“The vast majority of citizens currently struggle to make ends meet and simply do not have the capacity to exchange old for new.”
“This form of exchange old for new is primarily a way to boost sales, ultimately misleading the market and causing potential waste. It could also overextend the market’s future consumption capacity, leading to another round of excess production capacity and entering a vicious cycle of economic difficulty,” Huang Dawei warned.
Wang Guochen believes that while reducing excess capacity is a factor, stimulating consumption remains crucial, as boosting consumption is essential for driving GDP growth.
He commented, “Consumption in mainland China is currently askew, indicating an overall phenomenon of deflation.”
To encourage spending, Beijing authorities have pushed the exchange old for new initiative, offering subsidies to the public and distributing consumer coupons as a more direct alternative. Wang Guochen noted that the authorities have chosen the former option as a necessary policy. He opined, “In the current situation where people are financially constrained, the exchange old for new may not yield good results.”
Recently, to promote the exchange old for new in consumer goods like electronics, local governments have been instructed to implement the initiative. Reports from Shanghai, Shandong, and other regions suggest that community committees are marketing discounted home appliances to residents and even conducting surveys on the lifespan of appliances in households.
“It’s somewhat a coercive form of consumption, which poses a dilemma for the public.”
“However, as people lack disposable income, it becomes questionable how to extract that money from them. Whether this might trigger a new wave of social backlash remains to be seen and warrants attention,” Wang Guochen concluded.