Beijing is spending $42 billion to save its ailing real estate sector. Analysts say it is not enough

China’s latest housing initiative targets vacant properties, a major weak point in a crisis that has dragged on for almost three years. But analysts say the package The measures are still too small to end the defeat.

The decline in new home sales in China has accelerated in recent months, with households increasingly preferring to buy on the secondary market. This has raised the stock of unsold homes and vacant land to the highest level in years, discouraging new construction and threatening more defaults by developers, including large state-owned companies.

The support package announced Friday includes a 300 billion yuan ($42 billion) credit line from the People’s Bank of China that will finance bank loans for state-owned companies tasked with purchasing completed but unsold homes. Economists expressed concern both about the limited size of the measure relative to the stock of unsold homes and the risk that it will not be fully implemented.

Officials said the central bank program can incentivize bank loans worth 500 billion yuan. That would only address a fraction of the value of vacant apartments in China, which economists estimate at several trillion yuan.

“Any game-changing real estate easing measures (including housing stock reduction measures) would likely require significantly more financing than has been available so far,” Goldman Sachs Group Inc. economists led by Goldman Sachs Group Inc. wrote in a note. Lisheng Wang, citing previous research indicating that getting exceptional housing inventory back to 2018 levels would require 7.7 trillion yuan.

A Bloomberg gauge of Chinese developer stocks fell as much as 3.2% on Monday morning after posting its best week since late 2022 last week, as investors took profits and caution emerged over whether the measures were enough to control the real estate crisis.

This contrasts with positive coverage from Chinese state media on Monday. The Securities Times reported that Chinese developers’ sales centers in more than 10 cities, including Beijing and Shanghai, recorded an increase in visits from home buyers over the weekend.

President Xi Jinping’s economic czar has backed the high-profile program, which gives local governments the responsibility of converting previously unsold apartments into affordable housing. The real estate sector has become the biggest drag on the world’s second-largest economy, weighing heavily on consumer confidence and spending.

Questions remain over whether banks will take full advantage of the new mechanism. The involvement of commercial lenders “will limit the speed and effectiveness of the deployment of funds,” said Rory Green, chief China economist at TS Lombard.

A previous People’s Bank of China loan program for commercial banks for rental housing projects had low take-up, with only 2% of the funds being used. The new stock reduction initiative has already been tested in eight cities and worked best in areas with an influx of population, a condition not met by all metropolises.

A program that encourages local governments to buy unused land from developers also faces challenges. Many regions are under fiscal pressure, and officials at a briefing on Friday warned that such efforts should not increase debt risks for local governments.

Regional authorities will be allowed to use part of their annual bond borrowing quota of 3.9 trillion yuan for the new initiative, but much of that amount has already been earmarked for infrastructure projects.

It’s unclear whether local governments will be willing to pay “anything close to what the developer paid” for the land, said Adam Wolfe, emerging markets economist at Absolute Strategy Research. “If developers have to recognize a loss on their land banks, then they may have to recognize some solvency issues, not just cash flow issues.”

To boost bank loans to developers to ensure they finish existing projects, officials are doubling down on a so-called “white list” that identifies developments worthy of support. According to officials, that plan, presented in January, has allowed approved loans to reach more than 900 billion yuan.

But the funds do not appear to be reaching real estate companies, which raised less than 600 billion yuan in loans for construction projects in the first four months of the year, according to the country’s statistics office. That’s 9% less than the previous year.

The whitelisting program is limited by the incentives of commercial banks, which worry that developer defaults will hurt their bottom lines. The same issue applies to new measures that allow banks to reduce mortgage rates and down payment requirements.

Lenders have already cut mortgage rates to record lows and may be reluctant to make further cuts. Chinese banks on Monday left their benchmark interest rates unchanged following the central bank’s decision last week to maintain a key rate on loans it offers to lenders.

“The impact of this policy will be limited by banks’ narrow interest rate margins,” said Serena Zhou, senior China economist at Mizuho Securities Asia Ltd.

Households could also use lower rates to buy existing properties rather than new build properties, as those prices have fallen further and delivery is not a concern. Sales of existing homes in China surpassed new homes by area for the first time on record last year, underscoring a fundamental shift in buying habits that means less cash for developers.

Cutting mortgage rates to spur sales may work in larger cities with higher demand for housing, but not in smaller ones where rates have already been cut to a minimum, said Houze Song, an economist at the Paulson Institute, a U.S. think tank. .

“The new policies may stimulate property sales for a couple of months,” he added. “But I doubt it will be enough to turn the tide.”

Subscribe to the CFO Daily newsletter to stay up-to-date on the trends, issues and executives shaping corporate finance. Sign up free.

Leave a Comment