Recently, the Chinese Communist Party (CCP) has been consistently releasing information about boosting the real estate market to address the issue of inventory accumulation, with terms like “de-stocking” becoming popular among officials like Li Qiang. These high-ranking officials have been emphasizing the importance of maintaining stability in the real estate sector, stating that it is crucial for the overall operation of the economy and financial stability. Experts believe that this indicates the significant risks the real estate sector poses to the CCP, yet authorities lack effective measures to tackle the situation.
According to a report by China’s Zhongfang.com on June 13, the total inventory in the current Chinese market, calculated broadly, amounted to 73.27 billion square meters as of the end of April. This includes the total construction area of houses nationwide (6.875 billion square meters), the area of unsold commercial housing (0.745 billion square meters), minus the area of newly sold commercial housing (0.293 billion square meters), resulting in a de-stocking period of 100 months. This calculation does not even account for land inventory that has been acquired but not yet developed. When considering the narrow definition of inventory, the de-stocking period has already exceeded 10 months.
Narrowly defined, real estate inventory refers to completed but unsold existing houses, namely the aforementioned area of unsold commercial housing (0.745 billion square meters).
On June 12, the People’s Bank of China convened a meeting to advance the work on refinancing for affordable housing, emphasizing the need to accelerate the de-stocking of existing commercial housing and strictly avoid adding to local hidden debts.
The meeting claimed that the development of the real estate industry is closely related to “the immediate interests of the people, the overall operation of the economy, and financial stability.” Premier Li Keqiang mentioned the same sentiment during the State Council’s executive meeting on June 7. At the national housing work conference in May, Vice Premier He Lifeng also highlighted how real estate is related to the “overall economic and social development.”
Observers believe that the official rhetoric indicates a downturn in the real estate sector, leading to the escalation of various risks, including financial risks.
On June 13, American economist David Huang told The Epoch Times that the varying statements on real estate inventory by officials reflect the need to show that the authorities are taking concrete actions, as there has been skepticism towards the CCP’s market support measures due to past excessive restrictions. This approach is also a way to emphasize the enormous challenges and risks faced by the entire real estate market.
“Over 70% of Chinese households’ wealth is tied to real estate. More than half of local financial resources rely on real estate. A significant portion of the financial system’s loans come from real estate entities. If the real estate market does not improve, it poses immense pressure and risks to local finances and the entire Chinese financial system, leading to significant downward risks affecting the national economy and people’s livelihoods.”
Taiwanese financial expert Huang Shicong, on June 13, stated that with an excessive number of empty or unsold houses in the market, real estate companies struggle with liquidity issues. Especially since these companies heavily depend on leveraging funds, the inability to sell inventory leads to operational pressures. Over time, this can create significant strains on the banking system, and in cases of bad debts, have a more significant impact on the financial industry.
On June 12, the CCP’s meeting emphasized the need to recognize the “people-oriented and politicized” nature of real estate work. Vice Premier He Lifeng first introduced these slogans on May 17.
Huang David pointed out that the CCP’s concern is primarily about its political security. When officials refer to “the people,” it’s a political concept, indicating those with voting rights and political interests in China, while the term “the people” does not encompass ordinary citizens.
“The term ‘the people’ is a political concept in Chinese, not the same as how we refer to ‘people’ in general. To draw a comparison, it’s similar to ‘citizens’ in the US, referring to those with voting rights, whereas in China, only a minority has such rights.”
Regarding the emphasis on the political nature of real estate by authorities, Huang David explained that it stems from real estate industry’s impact on financial instability, posing significant challenges to the CCP’s regime. Without financial stability, it becomes challenging for the CCP to alter the global order.
Huang Shicong pointed out that CCP officials are merely chanting slogans and are aware of the economic instability that poses a threat to the CCP’s rule. Thus, they hope to resolve the issues but are constrained by Xi Jinping’s policy tightening and reluctance to shift away from previous strategies. With a communist mindset, authorities are unable to address economic problems in a short period, hence resorting to merely showing concern and proposing measures.
Huang Shicong further noted that the authorities are also aware that the public has lost confidence in them, leading to heavy censorship of negative economic sentiments on online platforms. However, without a change in the leadership’s mindset, lower-level officials can only address immediate financial issues while tightening control over the population, which fails to offer a genuine solution to the problems.
On May 17, He Lifeng chaired a national video conference to ensure the proper handling of affordable housing, calling for a determined effort to address the risks of abandoned commercial housing projects and promote de-stocking of existing commercial housing.
Amid the continuous downturn of the Chinese real estate market, since the CCP’s political bureau meeting in April set the tone for a series of market support measures, on May 17, the authorities announced three major initiatives. First, lowering the down payment ratio for property purchases, adjusting the first-home down payment ratio to no less than 15% and the second-home commercial loan minimum down payment ratio to no less than 25%. Second, reducing mortgage rates, including lowering the interest rates on housing provident fund loans and lifting the lower limit on commercial mortgage rates.
The third initiative involved cities with excess commercial housing inventory wherein the government could acquire some commercial housing at reasonable prices for use as affordable housing. The People’s Bank of China also established a 300 billion yuan (41.5 billion USD) refinancing plan for state-owned enterprises for affordable housing.
However, the market greeted the CCP’s May 17 market support policies with skepticism. Based on Bloomberg’s analysis of the China Developers Index, the Chinese real estate stocks fell by 3.3% on June 6, accumulating a drop of nearly 21% since mid-May.
According to a report by Reuters on June 10, the 300 billion yuan loan plan could bring about 500 billion USD worth of bank financing to local state-owned enterprises to buy completed but unsold houses. However, some private developers found that their projects were rarely selected to receive loans.
Financial expert Laoman commented on the People’s Bank of China’s plan to use a 300-billion-yuan refinancing scheme to revive the real estate market, stating that considering the current state of China’s real estate market, as of the end of April, the inventory was 0.745 billion square meters, with the average national selling price standing at approximately 9,500 yuan, totaling around 70 trillion. It’s important to note that this inventory concept includes unsold goods for which sales permits have been obtained, excluding undeveloped land.
“Using 300 billion to rescue 70 trillion, the People’s Bank’s idea might be to make a show of it, in case the people fall for it and continue to deplete their savings to buy houses!”
Huang David suggested that the authorities may introduce additional measures in the future. However, the real estate market has faced three main problems for the past 20 years. Firstly, the taxes on real estate developments and transactions are excessively high and should be reduced. Secondly, the housing support for middle and low-income families is insufficient and needs to be addressed through monetary methods. Lastly, the management and policy efficiency are low, making it challenging to adapt to market demands. “If these three aspects are not addressed, other methods will not yield long-term effects.”
Huang Shicong believes that the authorities currently focus on de-stocking to provide liquidity to existing development companies to sustain for the time being, waiting for a rebound in the real estate market. However, introducing more stimulating policies at present raises doubts about whether the people would still have the financial capacity to make purchases. Lowering property prices is not a viable solution as banks initially loaned to real estate companies based on the prices at that time, lowering prices may prompt developers to provide more collateral.
“To solve the inventory issue in the short term, the government must make more significant efforts to purchase real estate. However, this approach presents significant challenges. The central government hopes that local authorities will buy real estate using their own funds, but local finances are already stretched thin.”
The CCP’s Ministry of Public Security, under the control of Wang Xiaohong, held an expanded meeting on June 5, emphasizing the need to “strengthen financial risk monitoring and early warning, coordinate risk prevention and control in key sectors such as small and medium financial institutions, local government debt, and real estate.”
Huang David expressed that this reflects the spread of the real estate crisis throughout society, prompting authorities to be on high alert. During China’s 2015 financial crisis and stock market crash, the authorities resorted to using discipline inspection and public security departments to stabilize securities companies and listed enterprises.
“They might apply similar methods to the real estate market issue now. By involving public security to maintain social stability and control those responsible and people seeking remedies.”
Huang Shicong pointed out that the involvement of the Ministry of Public Security in handling real estate issues indicates that real estate or economic problems in China could lead to disturbances, making the authorities very nervous. However, the current challenge lies in the authorities’ inability to find effective measures to stabilize the real estate market.