The Chinese Communist Party’s rescue measures for the housing market have been poorly implemented. The 3 trillion yuan (RMB, hereinafter) housing market relief plan announced in May has only disbursed 247 billion yuan so far, falling short of the plan by 8%. Due to the low returns on such loans, neither banks nor local governments have the motivation to push forward.
In May, the Chinese Communist Party rolled out the so-called “major” measures, requiring the People’s Bank of China and state-owned banks to issue up to 3 trillion yuan in housing refinancing to support local governments in acquiring existing unsold housing stock. Subsequently, local governments would rent out these properties as social housing.
According to the Financial Times, the latest data from the People’s Bank of China shows that only 247 billion yuan in loans have been disbursed under this plan.
Goldman Sachs China economist Wang Lisheng mentioned that execution of policies has always been a major bottleneck in China, with banks, local governments, and other institutions finding it difficult to agree on pricing real estate.
Initially, the market welcomed Beijing’s refinancing plan, viewing the policy of supporting local governments in purchasing unsold houses as a step in the right direction in intervening in the market. However, in less than a month, real estate stocks plunged back to their original levels.
Goldman Sachs estimates that China’s new inventory of unsold houses now exceeds the monthly sales volume by 30 times. Assuming purchasing unsold residential properties at half the market price and reaching the monthly sales volume from the first nine months of 2018, the government would need to invest 7.7 trillion yuan.
Under the refinancing plan, the People’s Bank of China pledged to provide up to 3 trillion yuan in funds. Banks can use these funds to support up to 60% of the principal loans, resulting in a total of 5 trillion yuan in loans. However, the 5 trillion yuan relief only accounts for 6% of Goldman Sachs’ estimated necessary funds, deeming it insufficient.
In its second-quarter monetary report this month, the People’s Bank of China stated that by the end of June, the bank had only extracted 121 billion yuan of its own funds, while the total outstanding loans amounted to 247 billion yuan.
According to observations by UK-based Capital Economics, some funds have already been injected into the early pilot program launched in February 2023, which later merged with the May refinancing plan, resulting in even lower loan amounts from the new plan.
“The funds invested so far are still too little to have a significant impact on overall housing demand and developer financing,” noted a report from Capital Economics.
Analysts believe the issue lies in the current refinancing plan where rental yields are not high enough for banks to consider providing loans reasonable. On the other hand, authorities emphasize allowing banking institutions to “make their own decisions and bear their own risks.”
Zhang Xiaoxi, an analyst at Longzhou Economic Information, told the Financial Times that rental yields in Chinese cities range from 1.75% to 3%, while current bank loan interest rates are closer to higher corporate loan rates. According to the People’s Bank of China’s January data, the weighted average interest rate for corporate loans in 2023 was 3.88%.
She stated that local officials seem not enthusiastic about launching many such projects and may prefer to wait and see if the market will bottom out without further intervention.
Larry Hu, Chief China Economist at Macquarie Group, expressed, “My feeling is that credit risks are still too high for banks. Given the low rental yields, local (state-owned enterprises) might also lack the incentive.”
Hu mentioned in a May research report that the refinancing plan lacks critical details, such as financing amounts.
“Looking ahead, the key is when and in what scale the central government will provide funding sources,” he wrote. “To evaluate the extent of impact, the key question is who will provide funds for purchases and how much they will ultimately provide.”
Arthur Budaghyan, Chief Emerging Markets/China Strategist at BCA Research, also emphasized at the time that this loan needs to be spent quickly, rather than gradually over three to five years.
“The question is how much, when, and how fast,” he said.
The People’s Bank of China did not respond to requests for comment.
Many economists argue that the fundamental need for the Chinese economy is to provide market relief and take more measures to help real estate developers restructure debt and complete unfinished projects, while also boosting the confidence of homebuyers through direct subsidies.
However, the Chinese Communist Party leadership has been unwilling to introduce such measures. In 2023, the Wall Street Journal cited sources familiar with the matter, saying that this reluctance is partly due to the leadership’s preference for austerity ideology.
On August 2, the IMF called on the Chinese government to use central government fiscal resources to “ensure the housing market.” The report stated that the one-off plan’s cost is equivalent to 5.5% of China’s GDP over four years. The estimated figure is around 1 trillion US dollars.
The official Chinese representatives rejected the IMF’s proposal, stating, “We believe it is not appropriate for the central government to directly provide fiscal support, to avoid creating a government safety net expectation that could lead to moral hazards.”
Chinese netizens expressed dissatisfaction with Beijing’s rejection of the IMF’s market rescue plan. One netizen wrote on Weibo, “What is the purpose of rescuing the property market? Ordinary people are always the sacrifices, bearing hardships, working hard, making contributions, it’s normal, it’s reality.”
Furthermore, Beijing’s refusal to ensure the housing market is also related to the Chinese economy.
Currently, China is facing a severe economic situation. Credit demand has significantly dropped, with new loans to the real economy in July turning negative for the first time since 2005.
Michael Pettis, a finance professor at Peking University, mentioned on X social media platform that official data shows China’s overall economy is weak, but more importantly, the quality of economic growth is deteriorating.
“In the Chinese context, so-called high-quality growth is economic growth shares occurring under hard budget constraints, primarily those driven by domestic consumption and private enterprise investment,” he wrote.
Data shows that not only is consumption lagging in China – retail sales grew by 3.5% in the first seven months of 2024, industrial output rose by 5.9%, but overall fixed asset investment growth was 3.6%, while private enterprise investment remained flat. “This is the real issue,” he stated.