China's real estate rescue package has limited impact, analysts say

The government needs to spend more to nationalize unfinished buildings
By Huang Chun-mei and Qian Lang for RFA Mandarin
2024.06.19
China's real estate rescue package has limited impact, analysts say A view of unfinished residential buildings developed by China Evergrande Group in the outskirts of Shijiazhuang, Hebei province, China, Feb. 1, 2024.
Tingshu Wang/Reuters

A rescue package for China's beleaguered real estate sector has fueled a modest rise in home sales in major cities, but demand remains lackluster in smaller cities amid a widespread lack of confidence in developers' ability to deliver, analysts told Radio Free Asia.

On May 17, China slashed mortgage rates and requirements, and called on municipal governments to buy up unsold apartments for conversion into low-rent housing, in a bid to shore up the country's burst real estate bubble.

But an informal survey conducted by Reuters suggests that the impact of the rescue package has been uneven, boosting sales in Beijing and Shanghai but not so much in other cities.

Top real estate developers in China saw sales volumes rise by 4% in May compared with April, according to a Nikkei Asia analysis, which reported that just over 11 million square meters of real estate were sold among 20 major developers. While this was higher than April's total, it was a 34% decline from a year ago, the news service reported.

China's National Statistics Bureau reported that sales prices of newly built commercial housing in first-tier cities fell by 3.2% year-on-year. Prices in second- and third-tier cities fell by 3.7% and 4.9% year-on-year, respectively.

Meanwhile, sales of pre-owned homes in top-tier Chinese cities fell by an average of 9.3% year-on-year in May, with Guangzhou recording a fall of 11.4% compared with May 2023, according to government figures.

‘Marxist financial theory’

China’s Communist Party has vowed to step up control of the country's financial system, using "Marxist financial theory" to stave off systemic risks and boost the flagging economy.

"Risk prevention and control" were highlighted as "the eternal theme" of financial policy amid spiraling local government debt and a burst property bubble, according to an official report on the five-yearly Central Financial Work Conference that ran behind closed doors in Beijing from Oct. 30-31.

Meanwhile, reports have emerged on social media that authorities in the eastern port city of Qingdao have been putting pressure on anyone with lots of money in the bank to invest in real estate.

If residents have huge deposits in their bank accounts but do not buy houses, "it means they are not aware enough. We need to remind them and talk to them to persuade them [to buy]," according to a screenshot of new employee assessment guidelines at a sub-district office in Qingdao that emerged on social media and appeared in several media reports outside China.

A Guangdong real estate industry insider who gave only the surname Zeng for fear of reprisals told RFA Mandarin on June 12 that officials and state-owned enterprise employees are under similar pressure in the southern province of Guangdong.

"The leaders of a state-owned enterprise in Guangdong held a meeting of middle-ranking officials at which department-level cadres were encouraged to buy real estate voluntarily, with down payment requirements reduced to 7.5% to comply with the new policy," Zeng said.

"But the more favorable the policies are, the less people want to buy real estate," she said.

‘Too many apartments’

A Qingdao resident who gave only the surname Zhang for fear of reprisals said he had heard of similar moves where he lives.

"There are too many apartments in Qingdao right now," he said. "They've been building them everywhere in the last couple of years, but they aren't selling, new or second-hand."

ENG_CHN_REAL ESTATE WOES_06182024.2.jpg
A view of unfinished residential buildings developed by China Evergrande Group in the outskirts of Shijiazhuang, Hebei province, China, Feb. 1, 2024. (Tingshu Wang/Reuters)

"They're also offering trade-ins of old apartments for new, and there are government subsidies," Zhang said.

Analysts told RFA that there is a profound crisis of confidence in real estate that requires far more drastic measures to fix.

"Firstly, people have no money to buy property, so even if the Chinese government continues to cut mortgage interest rates, it will be pretty meaningless," Wang Guochen, assistant researcher of the First Research Institute of the Chinese Academy of Economic Research, told RFA Mandarin.

"Secondly, anyone with money won't be buying new property, because they don't know whether the developers will go bankrupt, and they worry the building will be left unfinished."

"Thirdly, there's the psychological factor, which is that people expect property prices to fall further, so they are holding back and waiting to see what happens, even if they do have money," Wang said.

Buy them all up

Wang said the only way to fix the issue of unfinished buildings would be for the government to buy them all up, citing comments from Vice Premier He Lifeng on May 17.

But he said the government would need to spend at least 10 trillion yuan to solve the problem, compared with the 500 billion yuan price tag for last month's measures.

Reuters quoted analysts as saying that Beijing needs to direct more funds to smaller city governments to reduce inventories and stabilize those markets, "but most expect gradual support rather than any big-bang measures as authorities are wary of bailing out profligate developers."

Sina Finance quoted Lu Ting, chief economist of Nomura Securities China, as saying that Chinese developers have a serious delivery problem, estimating that 10-20 million housing units are currently overdue.

And the lackluster sales spell trouble for developers, even the largest state-owned enterprises, Lu warned.

Chen Songxing, director of the New Economic Policy Research Center at National Donghua University in Taiwan, told RFA Mandarin that the government is trying to boost sales of real estate to maintain liquidity and prop up developers.

"If a real estate developer gets into trouble, then a project becomes an unfinished building," Chen said. "Homebuyers will stop paying their mortgages, and that will lead to a rapid increase in bad debt for banks."

"Normally, you would inject capital to deal with a bad debt problem, but the problem is that there are too many hidden bad debts, and local governments just may not be able to do that right now," he said.

Many banks are getting out of the real estate business altogether, according to state-backed media The Paper.

It cited figures from the state financial regulator as showing that 1,257 branches stopped offering real-estate financing in the first five months of this year, a year-on-year increase of 30.4%.

Wang Guochen said the authorities have been trying to tap major state-owned enterprises to buy up real estate, but these companies are often sitting on their own hidden debts, and have little to offer.

"This isn't the first time state-owned enterprises have been expected to bail out the markets -- they were also told to come forward during the stock market crash in January," Wang said. "In other words, the banks have been squeezed dry, and now they're trying to squeeze state-owned enterprises."

"But recently, it has emerged that state-owned enterprises are also riddled with bad debt, so there's not much there to squeeze," he said.

He said even China's authoritarian system can't suppress all financial risks, which are rising even after the government has used all the tools at its command.

Translated by Luisetta Mudie. Edited by Malcolm Foster.

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