Recently, in an effort to save the struggling real estate industry, the Chinese Communist Party has proposed a series of seemingly grand plans, including having local governments borrow money to purchase overpriced properties and then sell them at a discounted price.
Beijing has labeled this newly announced real estate industry rescue plan as “historic”. It is considered historically significant because it is one of the largest real estate industry rescue plans in Chinese history. However, this plan does not substantively address China’s real estate crisis.
The rescue plan requires local governments to purchase unsold houses and then sell or rent them at prices below market value. This will only delay the inevitable clearing of the double problems of debt and overcapacity in the real estate industry. Furthermore, the CCP’s administrative intervention exacerbates the issue, worsening the already growing debt crisis.
Following the launch of the plan, it was immediately hailed as a huge success, citing the rise in the Chinese stock market after its announcement. However, it is important to remember that short-term fluctuations in the stock market are mainly based on investor sentiment rather than changes in economic fundamentals.
Over the past three years, due to overall economic decline and concerns about increasing debt and overcapacity in the real estate industry, the Chinese stock market has lost up to $6 trillion in value. This means that even with a significant stock market rally, it cannot return to previous levels. The temporary stock market rise does not prove that Beijing’s real estate market rescue plan is a good idea or that it can save the struggling real estate industry.
The rescue plan essentially reallocates tax revenue to private developers. This will save these companies from bankruptcy, allowing them to continue operating. However, their business is to build more properties, perpetuating the long-term problem.
The real estate industry is already oversupplied, while young people cannot afford homes. Additionally, China is facing an aging crisis, partly because young people cannot afford to buy homes and start families. In a free market economy, it is impossible to have both an oversupply of commercial housing and an oversupply of potential buyers. Prices need to decrease to meet demand for the market to reach balance.
Western countries, including the United States, are typical examples of how the real estate industry operates in a free market. Many young people complain about high housing prices and being unable to afford homes. Although this is true, the situation in the US and Western countries is different from China because the housing market is not oversupplied. While prices may be high, there is no shortage of potential buyers. If fewer people are willing to pay for homes, prices naturally decrease. However, under the CCP’s rule, administrative intervention prevents housing prices from falling to meet market demand.
In summary, there are several reasons why Beijing maintains high housing prices. First, developers are among the most heavily indebted entities globally, comprising a significant proportion of bank loan portfolios. Allowing real estate prices to freely drop would expose these bad loans, leading to developer defaults. A series of defaults by China’s largest developers could trigger a banking crisis.
Another reason the CCP government hopes to maintain high housing prices is that the real estate industry plays a crucial role in the Chinese economy, accounting for 20% – 30% of GDP. If property values decline, GDP will also decline. In recent years, China’s economic growth has significantly slowed down. A substantial drop in real estate industry value would lead to a noticeable decline in GDP growth, a situation the CCP regime cannot afford to face.
By the way, Western analysts have long speculated that China’s GDP growth figures are inflated by the central government. This real estate crisis proves these accusations to be correct. The CCP government controls housing prices, which is a significant factor determining GDP size. The oversupply of real estate exists because the CCP artificially maintains high housing prices. Therefore, the fact is that the CCP artificially inflates China’s GDP.
This real estate industry rescue plan not only fails to resolve the real estate crisis but also exacerbates China’s debt crisis. As the People’s Bank of China, the CCP’s central bank, prepares a $42 billion fund to support the purchase of unsold properties, China’s debt-to-GDP ratio has already exceeded 286%. A decline in GDP would increase this figure, so the CCP government absolutely cannot allow property prices to fall. At the same time, an increase in debt would lead to a rise in commercial housing prices.
In addition to encouraging local governments and state-owned entities to purchase unsold properties, there have also been reductions in down payments and mortgage rates to stimulate demand for commercial housing. However, the Chinese economy is slowing down, and young people and migrant workers are struggling to find jobs. When ordinary people feel pessimistic about the economic outlook, they are unlikely to invest in properties. Relying solely on lowering mortgage rates and reducing high down payments is unlikely to stimulate sufficient demand for commercial housing and bring the market into balance.