China property: will fleet of policies to buoy sales stem slack tides in the housing market?

A new suite of policies from Beijing, intended to give China's property sector a jolt on both the demand and supply sides, has raised expectations that the real estate slump weighing down the national economy can be alleviated - but analysts argued more support will be needed before they revise their estimates upwards.

To dissipate the shadows cast over the property market after a cascade of defaults from major developers, Chinese authorities gave local governments approval to act as buyers of last resort for undeveloped land and unsold housing on Friday. This provides localities with another way to promote activity in the sector, as financial regulators pour in funds and restrictions on mortgages are relaxed.

Governments as well as state-owned enterprises will be able to purchase stockpiles of vacant homes and undeveloped land from struggling builders. Money for these acquisitions will be funded through China's central bank and the issuance of local government special bonds. Commercial banks, through 300 billion yuan (US$41.5 billion) in relending finances from the People's Bank of China, can invest up to 500 billion yuan.

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But even with this shift in approach, observers did not seem ready to declare the end of the crisis in sight. "It is really too small to make more than a marginal difference," said Alicia Garcia-Herrero, chief economist for Asia-Pacific at French investment bank Natixis. "The whole programme sounds like a sop to ailing developers."

Analysts at Morgan Stanley - which estimated a 4.8 per cent rise in China's gross domestic product this year and 4.5 per cent next year - said they believe a gradual stabilisation of the housing market through new policies may provide some cushion for the Chinese economy, as trade tensions and future restrictions may slow down the country's exports going forward.

However, reviving the property sector will take time, they said. "Focus may gradually shift from manufacturing upgrades this year to housing stabilisation next year."

More measures could be on the way sooner than that. At a late April meeting of the Politburo, a major decision-making body of the Communist Party, the reduction of housing stock was discussed as a matter of interest.

"There could be more support in the near term," said Nomura analysts Jizhou Dong and Riley Jin in a note.

"We believe the swift introduction of the policy package, with arguably limited implementation details, also implies the central government's increasing urgency to alleviate the downward spiral of the property sector."

Despite the announcement of the wide-ranging package last week, benchmark lending rates remained unchanged on Monday, indicating a satisfaction with existing proposals that renders alterations to monetary policy unnecessary.

Home sale values slumped 28.3 per cent year on year in the first four months of 2024, despite earlier attempts at shoring up the sector.

Domestic media outlets have tried to strike a positive note. The state-backed Securities Daily said in a front-page editorial on Monday that the new plan will help developers reduce inventory backlogs, generate cash flow and improve their financial standing. But it also warned of financial risks and the need to stave off any spike in non-performing loans.

Larry Hu, chief China economist at Macquarie Capital, compared the purchase plan to the Troubled Asset Relief Programme (TARP) rolled out by the United States in 2009 to repossess toxic assets, part of the larger fight to keep the subprime mortgage crisis under control.

However, state-owned enterprises may lack the incentive to buy unsold homes for social housing, he said - and many local governments are too indebted to procure land they already sold.

"With the 300 billion yuan in funding from the PBOC, it also said commercial banks need to 'act at their own discretion and bear their own risks' in lending. Banks still face significant credit risks and thereby are reluctant to lend," he said.

In addition, the 500 billion yuan in commercial bank loans covered by the central bank's relending represents only 0.4 per cent of China's GDP, Hu said - far lower than the 5 per cent of US GDP at Washington's disposal under TARP.

Macquarie has estimated 2 trillion yuan (US$276.8 billion) as the amount of funding needed if the government wants to lower the number of months it will take to unload the country's housing inventory from the current 28 to a safer level of 18.

"The government can help fill the gap left by pessimistic homebuyers and provide liquidity to developers," Hu said. "But it's not sufficient."

In a note on Friday, HSBC wondered whether it would be a good idea to layer more debt on already highly leveraged local governments with the home purchase initiative, but also said more policies could follow.

"Policymakers are approaching the matter with a heightened sense of urgency," the bank said. "So if it's not enough, more will come."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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