More than a year after one of China’s biggest real estate developers started collapseThe problems affected cities across the country. Dozens of other developers also missed debt payments, new home sales fell and construction cranes stopped in many places.
This week, China’s government, which until now has remained largely on the sidelines of the country’s housing bust, took the most decisive steps yet to try to minimize damage from the turmoil that has enveloped China Evergrande Group, the world’s most indebted conglomerate. developer and many of its competitors.
Real estate development plays a large role in China’s economy, accounting for about a quarter of its economic output and a quarter of its bank lending. Housing accounts for at least three-fifths of household wealth in China, and many Chinese see apartments as the only reliable way to build wealth.
The government’s intervention gained urgency this week The number of cases of COVID-19 has reached a record high. The infections have prompted a new wave of strict lockdowns that are disrupting factories and other businesses, reducing consumer spending and preventing homebuyers from visiting apartment complex showrooms. This further burdened the economy, which is already under severe pressure.
China’s cabinet late on Wednesday urged banks, most of which are state-owned, to lend more money to complete unfinished apartments, following a similar directive from regulators released hours earlier. China’s central bank, the People’s Bank of China and the main banking regulator codified 16 measures on the same day to ensure developers can borrow enough money from banks and bond investors and can delay repayments if needed. And on Friday night, the central bank cut by $70 billion the amount of money the country’s commercial banks must hold together in case of an emergency, allowing them to lend that money instead.
An affiliate of the central bank earlier this month agreed to guarantee the repayment of new bonds issued by some of the less risky property developers, effectively reassuring investors that it is safe to lend to the companies.
The Ministry of Finance has enacted tax credits for people who buy a new home within a year of selling their previous one.
Following directives from the cabinet and banking regulators, China’s biggest banks extended credit lines to major developers this week. The Industrial and Commercial Bank of China announced on Thursday that it has provided credit lines totaling $91 billion to 12 developers. Bank of Communications has provided a $14 billion credit line to Vanke, China’s largest developer.
Yi Gang, the central bank governor, said the government is willing to use its policy tools to stabilize the country’s huge real estate sector.
“China’s housing sector is connected to many upstream and downstream industries, so its healthy development is of great importance to the overall economy,” Yi said in a speech on Monday.
Financial regulators in China are under pressure to rebuild public confidence in the real estate sector. Both domestic and international investors have been selling bonds and other assets and moving money out of the country as concerns persist about an economy that is expected to grow at barely half of Beijing’s target of 5.5 percent this year. Speculation is rife that Chinese leader Xi Jinping may raise taxes on the wealthy to pay for more social spending.
Bond prices fell in Shanghai trading this fall, pushing up yields and making it more expensive for developers to borrow without government help. Lightly regulated wealth management funds, many of which use borrowed money to make big bets on bond markets, have seen investors pull out large sums – another sign of heavy financial pressures that are also affecting housing.
Like China’s health policy, it is stuck in an inflexible state “zero covid” With lockdowns and mass testing, China’s housing policy is also at a standstill. Mr Xi’s strong stances have complicated dealing with the housing crisis and Covid policy.
With exports falling right now and consumer spending weak during widespread Covid lockdowns, the economy is even more dependent on housing.
“Saving the property market means saving the economy,” Han Xiuyun, an associate professor of economics at Tsinghua University, said in an online analysis.
In housing, the crucial question is whether the government should once again tolerate people using housing investment as a way to make money, rather than just a place to live. Mr. Xi Jinping declared in 2016 that “housing is for shelter, not for speculation,” an idea that became government policy two years ago. The housing ministry there introduced a “three red lines” policy that set barriers around how much developers could borrow.
The aim was to prevent developers from borrowing excessively and investing money in speculative projects, while restricting banks from lending too much. Crossing even one red line put pressure on developers to start paying off debts, and that quickly put a strain on their finances.
The Ministry of Housing has kept the three red lines policy in place even though at least three dozen real estate developers have missed payments on one or more bonds, especially overseas bonds.
China’s housing market was already bloated and could collapse even without tougher policies, some analysts believe, after house prices soared over the past quarter-century.
Oxford Economics calculated this week that the prices of new-build homes across China reached 8.5 times average household disposable income last year. In the United States, the ratio peaked at 5.8 times in 2007, before the US housing bubble burst.
Some economists say Mr. Xi was right to address the speculation, but that the policy response needs to be crafted more carefully.
“Although the policy direction of ‘housing is for life, not for speculation’ is correct, the implementation of the policy may require fine-tuning in light of market conditions,” Zhu Ning, deputy dean of the Shanghai Advanced Institute of Finance, said.
This week’s flurry of regulatory activity could mark the beginning of that fine-tuning.
An affiliate of the central bank has begun guaranteeing $35 billion worth of bonds to be issued by local real estate developers. Government guarantees will allow developers to sell new bonds at low interest rates to state-controlled banks.
The proceeds from the new bonds will then be used to repay or buy back the existing bonds. The aim is to mitigate the steep interest costs faced by developers.
In another of the measures announced this week, the China Banking and Insurance Regulatory Commission separately told banks they could delay collecting interest and principal from developers for a year. This reprieve allows China’s commercial banking system to avoid experiencing a large wave of bad loans that would otherwise squeeze profits.
The Department of Housing has begun allowing local governments to lift their sweeping limits on who can buy apartments. Until now, many cities have discouraged out-of-town investors from buying homes to make apartments cheaper for long-term residents.
Finally, China’s Ministry of Finance has approved a temporary tax break to ensure investors keep their money in the property market. The rule says that the 20 percent tax on the proceeds of the sale of the property can be avoided if the proceeds of the sale are invested within 12 months in another property.
The tax break, which resembles the so-called Section 1031 tax provision for real estate investors in the United States, will expire at the end of next year. The idea is to encourage people who have made large gains in the value of their homes to upgrade to newer, larger apartments. That could help revive at least part of China’s huge construction industry.
The longer-term problem is that the huge movement of rural people into cities that began in the 1980s has slowed as villages have been depleted of people while the country’s birth rate has fallen. Oxford Economics estimated this week that demand for housing was 8 million units a year between 2010 and 2019, but would fall to just 4.6 million a year from next year to 2030.
The dilemma for Beijing is how to manage the decline in construction and many associated industries, from steel and cement to furniture and washing machines.
The construction sector “has to shrink,” said George Magnus, a fellow at the China Center at the University of Oxford. “The question is how and at what cost.”
Li You contributed research.