China’s housing market continues to struggle, with the Communist Party rolling out wave after wave of market rescue measures that have shown limited effectiveness. Recently, the Party introduced what it calls “heavyweight” measures, with the “local government purchasing unsold commercial housing” being considered the boldest real estate market rescue initiative to date.
The plan to purchase unsold commercial housing requires significant financial support, but local Communist Party governments are already heavily indebted. Where will the funds come from? Experts analyze that authorities will resort to printing money, with the issuance of special bonds continuing to rise.
On May 17th, Vice Premier of the State Council of the Communist Party, He Lifeng, announced at the “National Meeting on Ensuring Stable Housing and Real Estate Transactions” that in cities with excess commercial housing inventory, local governments are urged to purchase some of the unsold properties at a “reasonable price” to stabilize housing prices.
He Lifeng stated that these houses will be used for affordable housing but did not provide a timeline or specific details on the funding sources for the purchases.
The policy of “government buying to reduce inventory” is considered the Communist Party’s most audacious move to save the property market. The Hangzhou municipal government recently announced that it would purchase apartments in the Lin’an district at market prices (up to 100,000 square feet) for public leasing. This action by the Hangzhou government is seen as the first step in “Beijing stepping in to buy and reduce inventory.”
American economist David Huang believes that requiring local governments nationwide to buy unsold commercial housing poses significant implementation challenges. He told Dajiyuan, “First, there is immense financial pressure as local governments are already deeply in debt, basically insolvent.”
“Second, there is a lot of rent-seeking involved in these processes.”
He argues that the large-scale rental housing model historically has proven to be a failure for countries. Not only does it require substantial funding, but it also lacks scientific practicality. “Now, going to acquire millions of units is simply to allow officials to rent-seek and engage in corruption happily.”
“The most effective approach should be monetarily assisting middle and low-income families in renting or buying small quantities of houses, activating the entire market.”
Wang Guochen, a research assistant at the Chinese Academy of Economic Research, told Dajiyuan that this is just the government’s emergency measure. “The current issue is that the entire economy is stagnating, with people not buying new homes, leading to liquidity problems for developers. If this continues, large listed developers will continue to collapse.”
He believes that there are already too many houses in mainland China that cannot be filled, and property developers lack credibility. People are hesitant to purchase homes, and only if the government steps in to nationalize these properties and then sell or rent them out can there be a sign of recovery in the real estate market.
“The government’s intervention is too slow. It’s almost the end of May now, which is at least 2 to 3 months later than I had expected,” he said.
The real estate situation in mainland China continues to deteriorate. Earlier on May 17, the National Bureau of Statistics of the Communist Party released a series of data showing a significant decline in real estate investment, sales volume, and prices.
The data indicates that from January to April this year, the sales area of new residential commercial housing in China was 292.52 million square meters, showing a 20.2% year-on-year decrease, with the residential sales area declining by 23.8%.
According to data released by the National Bureau of Statistics of the Communist Party in April, as of March, the nationwide inventory of commercial housing reached 748 million square meters, setting a historical record and an increase of 100 million square meters compared to August last year.
Former Deputy Director of the National Bureau of Statistics of the Communist Party, He Keng, publicly stated in September 2023 that “(unsold commercial housing) may be enough to house 1.4 billion people, and those with purchasing power definitely won’t be able to buy them all.”
In addition to the massive inventory of unsold commercial housing, there are also numerous real estate projects awaiting funding for completion. Data shows that from January to April this year, the completed residential area was 188.60 million square meters, marking a 20.4% decrease, with the residential completion area at 137.46 million square meters, a 21.0% decline.
A report by the Macro Team of CITIC Securities Institute disclosed that since 2021, the unsold presold housing in China that has not yet been completed exceeds 2 billion square meters. The report estimates that the current investment required for “stabilizing transactions” is 7.6 trillion yuan.
Regarding the Communist Party’s “government buying to reduce inventory” policy, David Huang stated, “Ideally, the Pearl River Delta, the Yangtze River Delta, and the Bohai Rim areas should handle 50-60% (of unsold commercial housing). “Estimating these three regions alone, there are no less than 1 trillion yuan worth of inventory.”
“The (unsold commercial housing) with certain investment value, like in the core cities of the Yangtze River Delta, Pearl River Delta, and Bohai Rim area, still have some residential value. Whereas other cities basically have limited rescue value and significance,” he explained.
The question of how to address the enormous funding required for this round of real estate market rescue by the Communist Party has become a subject of wide external attention.
On the afternoon of May 17, the Press Office of the State Council of the Communist Party held its regular briefing, in which Deputy Governor of the People’s Bank of China, Tao Ling, claimed that city governments would select local state-owned enterprises as the main purchasers. The central bank established a 300 billion yuan loan to support local state-owned enterprises in purchasing housing. The central bank also announced the cancellation of the lower limit of mortgage interest rates, reducing the down payment ratio to 15%, and lowering the interest rate for housing provident fund loans.
However, the central bank’s 300 billion yuan remains just a drop in the bucket compared to the funding gap for government housing purchases. According to estimates by Guotai Junan Securities, to meet the official requirements to shorten the inventory digestion cycle to within 18 months, a net compression of 7.4 months in the disposal cycle is needed, corresponding to the need to dispose of over 700 million square meters of inventory, requiring approximately 7 trillion yuan in funding.
The Ministry of Finance of the Communist Party announced in February that China’s national fiscal revenue in 2023 was 21.6 trillion yuan. At the same time, local Communist Party governments are heavily indebted, with debt totaling around 9 trillion US dollars.
Regarding the massive funding needed for this wave of real estate market rescue by the Communist Party, Wang Guochen stated, “Of course, they rely on printing (money), what else can they do?” “In the end, this money is all covered by the banks, so as long as there are no large-scale bank runs, the situation can still be managed.”
He said that the Beijing authorities underestimated the severity of the real estate collapse. “If they really want to solve the problem, local governments should foot the bill. The central government should allow local governments to issue special national bonds or have the central government issue special national bonds and allocate them to local governments for handling.”
“It can be expected that if they truly realize the severity of the problem, additional special bonds will continue to be issued.”
Four days before the Communist Party announced the “government buying to reduce inventory” policy, on May 13, the State Council of the Communist Party held a video conference to deploy the upcoming issuance of ultra-long-term special national bonds (with terms of 20, 30, and 50 years).
David Huang believes that these ultra-long-term national bonds should indirectly be used for real estate. “They (the Communist authorities) must issue a special long-term bond to achieve this. So, why have they recently issued 30- to 50-year bonds? It is actually to prepare for the local governments’ debt issues.”
“In a way, they are also injecting funds into society indirectly. Because their funds are specifically designed to purchase these local debt issuers, effectively providing funds to the debt-issuers, local governments.” He stated, “The ultimate result is to resolve the financial (debt) issues of local governments, allowing local governments to have the funds to deal with the difficulties in supporting the real estate market due to insufficient funds.”
He added, “The collapse of real estate and local governments will also affect the financial system, which is a significant strategic area that will be addressed through the raising of ultra-long-term special national bonds.”