China tries to resolve the property issue with a large rescue package

China tries to resolve the property issue with a large rescue package

Lower down payment requirements for homebuyers and $300 billion ($42 billion) in central bank funds are also included in the assistance package to assist government-backed companies in purchasing surplus inventory from developers.

The administration of Xi Jinping unveiled its most ambitious plan to date to stabilize the struggling Chinese real estate market, loosening regulations on mortgages and pushing local governments to purchase unsold properties as worries about the industry's negative impact on economic development mount.

Additionally, the assistance package lowers the required down payment for homeowners and provides 300 billion ($42 billion) in central bank funds to assist government-backed companies in purchasing surplus inventory from developers. After that, such properties would be transformed into reasonably priced homes.

Although the announcement was well received by stock investors, who saw a roughly 10% increase in developer share prices on Friday, it is yet unclear how effective the strategy is in putting an end to the real estate crisis. Some observers argue that the money made public by China's central bank is insufficient to rectify the supply-demand imbalance in the housing market, and many prospective purchasers are holding off on making an offer until prices have dropped even more.

Xi's increased emphasis on supporting the world's second-largest economy—which is confronting several obstacles, such as growing US tariffs and record high young unemployment—was nonetheless highlighted by Friday's declaration. Currently, the challenge is whether authorities can come up with the appropriate combination of legislative changes and financial force to support confidence without going back to the extremes of the previous decades' speculation.

Zhu Ning, a finance professor at Shanghai Advanced Institute of Finance, stated in a Bloomberg TV interview that "this is a little bit similar to the bailing out of financial institutions going through the Great Financial Crisis." It's a bit tough or premature for us to think we're out of the woods, however, until the central government steps in and extends its own credit to the real estate market.

According to the central bank, the refinancing scheme is expected to result in a total of 500 billion yuan of loans for home purchases. That falls short of experts' forecasts, which put the amount of money needed between 1 and 5 trillion yuan, depending on how quickly and how large the government processes the housing stock.

The markets responded favorably. The Property Index on the Shanghai Stock Exchange increased 6.2%. Gains this year to 16.8% are shown in a Bloomberg barometer of Chinese developer shares, which increased by 9.6%.

Arriving seven years after Xi said that "houses are for living in, not for speculating," it represents a new stage in Beijing's property policy. Although the recent actions may lessen the pressure on developers, they will hasten Xi's intentions to expand public housing.

Measurement Basket

"The property sector is connected with the interest of the masses and the more general problem of economic development," Vice Premier He Lifeng emphasized to officials at a meeting on Friday.

In addition, he underlined the need of moving on with the so-called "three big projects," which include public infrastructure, affordable housing, and urban rehabilitation.

The minimum down payment requirement for first-time buyers was lowered by the central bank on Friday to 15%, a record low, according to Yan Yuejin, research director at the E-house China Research and Development Institute. Buyers of second homes must now contribute 25%; these changes amount to a 5-percentage-point reduction.

Even with the elimination of the national minimum, mortgage rates will still need to be decided by each city. Communities are free to choose whether and at what rate to maintain a mortgage rate floor.

China has tightened regulations on developer debt for more than three years, and now state-backed China Vanke Co. and other real estate firms are in danger of failing. They have together missed payments on $124 billion in debt. With the number of demonstrations on the rise and the unsold home inventory at an eight-year high, it is endangering social stability.

A little over 5 million individuals are in danger of losing their jobs or having their wages cut due to the suspension of building and developer defaults. Pictures of stretches of unoccupied buildings and unfinished public works became internationally recognized symbols of the country's declining confidence and dissatisfaction with Xi's economic management.

Official statistics released on Friday revealed that property prices in April saw the greatest month-over-month declines in a decade, prompting policymakers to act with speed. Numerous actions taken in the last year have not succeeded in stopping the decline.

Second-in-command In order to relieve developers of their cash flow constraints, he said, local governments had to reclaim or purchase back property parcels that have been sold but are still unoccupied.

The inexpensive money that the central bank offers to lenders is known as the relending program. It gives money to regional state-owned firms selected by local governments to buy unsold properties at fair rates, up to 60% of the principal of bank loans.

According to Bruce Pang, head economist for Greater China at Jones Lang LaSalle Inc., China may also take into consideration financing instruments including special sovereign bonds and special local government bonds.

That may make matters worse for the government's debt load, which shot up to 56% of GDP last year.

Reducing Mortgage Interest Rates

In 2022, China started reducing the national mortgage rate floor and gave the most affected areas the authority to choose their own minimum rates. The average rate on newly approved mortgages dropped to 3.69% in the first quarter, the lowest since records started in 2009, as a result of these actions, but they were unable to spur demand for purchases.

By the end of March, the central bank reported that over 40% of localities had either eliminated or reduced their mortgage rate floor.

The head economist for Greater China at Australia & New Zealand Banking Group Ltd., Raymond Yeung, said that "the policy relaxation is just a marginal relaxation of the credit constraints." "How these steps can prevent household expectations of the property outlook is beyond me."

The actions are expected to put further pressure on Chinese state lenders' profit margins. Bad loans have increased and net interest margins have eroded as a result of the prolonged real estate crisis.

By the end of the previous year, the net interest margin of Chinese banks had fallen to a record low of 1.69%, well below the 1.8% level thought to be required to sustain decent profitability.

"The consequences will rely on how seriously consumers take the situation," said Shen Meng, a director at the investment firm Chanson & Co. in Beijing. "It's unlikely to stimulate demand as well as induce a structural turnaround if poorly executed."