China acts to stop property market flatlining

The country’s US$2.4 trillion new-home market still remains on life support as property debt defaults surge

China is racing to prop up its battered property sector by rolling out a rescue package.

The 16-point plan released by the People’s Bank of China and the Banking and Insurance Regulatory Commission will include loan repayment extensions for an industry that generates up to 30% of GDP. 

To illustrate the risks facing the world’s second-largest economy, owning property makes up 60 to 75% of China’s household wealth. 

“They will cull the herd, then ease up pressure to avert contagion. Then cull the herd, then ease up pressure to avert contagion. Seen [through] this lens, it’s less confusing,” research consultancy China Beige Book tweeted.

“But all of this is headed in one direction. Nothing is getting ‘fixed’,” it said.

Building blocks:

  • Key measures include allowing banks to extend time-sensitive loans to developers.
  • Down payments for new homes will also be cut along with mortgage rates.
  • Speeding up pre-sold homes to buyers is another crucial element of the plan.
  • In the summer, protests broke out over unfinished apartment blocks.

Between the lines: “To date, more than 300 groups of homeowners are believed to be refusing to pay between US$150 billion and $370 billion in loans, according to informal surveys,” Zhirong Ou, a senior lecturer in economics at Cardiff University, said.

Risk factors in some areas are rising [while] environmental constraints are tightening.

Vice-Premier Liu He

Delve deeper: Crushed by $300 billion of loans, construction giant Evergrande is in danger of shredding the entire property sector. Comparisons with Lehman Brothers and the resulting financial crisis in 2008 have not gone unnoticed.

Major risk: “The demise of China’s real estate sector, pushed by developer defaults and mortgage boycotts, is a major risk for the economy. Over time, its collapse might prove an even bigger shock than Beijing’s current ‘zero-Covid’ policies,” Alicia Garcia-Herrero, of the Brussels-based think tank Bruegel, said.

Big picture: The latest move by Beijing comes at a time of surging unemployment among the young, dipping manufacturing productivity, and the fallout from President Xi Jinping’s “zero-Covid” policy. Nationwide, there were more than 16,000 new cases on Monday.

Shock tactics: “Risk factors in some areas are rising, aging is accelerating, traditional advantages such as costs of labor are weakening, resource and environmental constraints are tightening, and scientific and technological innovation capabilities are not strong enough,” Vice-Premier Liu He said as reported by the South China Morning Post.

China Factor comment: Beijing has finally acted to stop the country’s critical real estate sector from flatlining. Still, China’s $2.4 trillion new-home market remains on life support as property debt defaults surge.