China pledges billions of dollars to support the faltering real estate sector

BEIJING — Chinese authorities on Friday pledged new support for state-owned enterprises to enable them to buy unsold apartments, in an effort that could help developers obtain more financing to finish construction on previously sold properties.

These and other measures announced on Friday represent Beijing's latest efforts to address issues in the massive real estate sector.

“I think it's encouraging that policy is taking a turn in the direction of trying to support the housing market,” said Zhou Ning, a professor of finance at Tsinghua University and author of “China's Guaranteed Bubble.”

The central bank will provide 300 billion yuan ($42.25 billion) to financial institutions to lend to local state-owned enterprises so they can buy unsold apartments that have already been sold, People's Bank of China Deputy Governor Tao Ling told reporters at a news conference on Friday. building.

The central bank expects the support to release 500 billion yuan to finance such purchases, which state-owned enterprises can turn into affordable housing.

The central bank said real estate companies could then use the money earned from those sales to complete the construction of other apartments.

As for unfinished and pre-sold properties, Xiao Yuanqi, deputy director of the National Financial Regulation Administration, told reporters that commercial banks have provided 935 billion yuan in loans to finish construction on whitelisted projects since the program was launched in January.

“The government’s purchase of housing stock can inject more liquidity to developers, who can then have more resources to provide housing,” Larry Hu, chief China economist at Macquarie, told CNBC. “Finally the government stepped in as the buyer of last resort.”

“At this point, it is primarily the responsibility of state-owned enterprises and local governments to implement policies, but their resources may be too limited to move the needle at the macro level,” he said. “Later, we may see more efforts by the central government.”

Earlier on Friday, Deputy Prime Minister He Lifeng spoke at a national video meeting on ensuring the completion and delivery of pre-sold homes, according to state media.

Officials who spoke to reporters on Friday said housing projects that cannot meet whitelisting requirements need to address their issues themselves.

Developers “who should go bankrupt should go bankrupt, while those who need to be restructured should be restructured,” Dong Jianguo, deputy head of the Ministry of Housing and Urban-Rural Development, told reporters in Chinese, translated by CNBC. He said the interests and rights of homebuyers should be given priority, and those who violate the law should be punished.

Solving China's real estate problems will take a long time.

Among the challenges faced by the latest measures, Zhou noted that local governments still have limited financial resources, limiting the amount they can purchase.

He added: “There may be some rent-seeking and moral hazard in deciding what to buy and what to pass on.” Rent seeking refers to when someone seeks to make more money without creating more value.

“Unless potential homebuyers sense some serious change in housing price appreciation, the current housing price is still too expensive relative to household income or rental yield,” he said. “However, I am not sure whether the government is prepared to go so far as to engineer another significant rise in house prices.”

The People's Bank of China on Friday eliminated minimum mortgage interest rates and lowered the minimum down payment ratio for first- and second-time homebuyers.

For many years, many apartments in China were sold before construction was completed. However, delays in the delivery of completed apartments have increased in recent years as developers have faced financing difficulties.

Nomura estimated last year that there were about 20 million pre-sold unfinished apartments in China.

At the current sales pace, it will take more than two years to liquidate the existing inventory of new homes, according to a Caixin report citing a local research firm as of March. The report said that this is equivalent to double the historical pace, which ranged between 12 and 14 months.

The official index of home prices for 70 cities released on Friday fell more quickly in April than in March, according to a Goldman Sachs analysis that looks at a seasonally adjusted annual weighted average.

Goldman said the numbers point to an 8.5% month-on-month decline in April, which is steeper than the 5.6% decline in March.

“Despite further local housing easing measures in recent months, we believe property markets in lower-tier cities continue to face strong headwinds from weaker growth fundamentals compared to higher-tier cities, including more severe oversupply issues,” the report said. “.

Correction: This story has been updated to reflect that Larry is chief China economist at Macquarie University.