Xi Jinping’s government announced its most forceful attempt yet to rescue the beleaguered Chinese property market, relaxing mortgage rules and urging local governments to buy unsold homes as authorities become increasingly concerned about the sector’s drag on economic growth.
The support package also includes lower down-payment requirements for homebuyers and 300 billion ($42 billion) of central bank funding to help government-backed firms buy excess inventory from developers. Those properties would then be converted into affordable housing.
While equity investors cheered the news — sending an index of developer shares up nearly 10% on Friday — it’s far from clear whether the plan to draw a line under the property crisis will be successful. The funding announced by China’s central bank is just a fraction of what some analysts say is needed to address the supply-demand mismatch in housing, and many potential buyers are waiting for prices to fall further before stepping in.
Friday’s announcement nevertheless underscored Xi’s renewed focus on propping up the world’s second-largest economy, which faces a slew of challenges from rising US tariffs to historically high youth unemployment. The question now is whether authorities can muster the right mix of financial firepower and policy adjustments to shore up confidence without returning to the speculative excesses of previous decades.
“This is a little bit similar to the bailing out of financial institutions going through the Great Financial Crisis,” Zhu Ning, a professor of finance with Shanghai Advanced Institute of Finance, said during an interview with Bloomberg TV. “But in the end unless the central government is stepping in and extends its own credit to the real estate market, it’s a little difficult or too premature for us to believe we’re out of the woods.”
The relending program is estimated to translate into 500 billion yuan of credit overall for housing buyups, the central bank said. That’s short of analysts estimates, which place required funding at 1 trillion to 5 trillion yuan — depending on the scale and speed at which the government digests housing inventory.
Markets reacted positively. The Shanghai Stock Exchange Property Index surged 6.2%. A Bloomberg gauge of Chinese developer shares jumped 9.6%, bringing gains to 16.8% this year.
It marks a new phase for Beijing’s stance on property, seven years after Xi dictated that “houses are for living in, not for speculating.” The latest measures, while potentially easing the pressure on developers, will accelerate Xi’s plans of increasing public housing.
Basket of Measures
Vice Premier He Lifeng stressed to officials during a meeting on Friday that “the property sector is related to the interest of the masses and the bigger issue of economic development.”
He also emphasized the need to push forward the so-called “three big projects” that involve affordable housing, urban renovation and public infrastructure.
The central bank on Friday cut the minimum down-payment ratio for first-time buyers to 15%, a record low according to Yan Yuejin, research director at E-house China Research and Development Institute. Second-home buyers now need to put forward 25%, with both moves representing a 5 percentage-point trim.
Each city will still need to make their decisions on mortgage rates, after the nationwide minimum was scrapped. Localities can decide if they still keep a mortgage rate floor and its level.
More than three years after China placed strict restrictions on developer debt, real estate companies including state-backed China Vanke Co. are on the brink. Collectively they’ve defaulted on $124 billion of dollar debt. It’s threatening social stability as protests spike and unsold housing inventory is hovering at an eight-year high.
With construction work halted and developers defaulting, about 5 million people are at risk of unemployment or reduced incomes. Images of tracts of empty buildings and uncompleted public works became global symbols of the nation’s waning confidence and disgruntlement with Xi’s handling of the economy.
Policymakers are bringing a sense of urgency as official data Friday showed that home prices in April recorded the steepest month-on-month drops in a decade. A slew of measures issued in the past year have failed to stem the downward spiral.
Vice Premier He also said local authorities should buy back or retract land parcels that have been sold but remain idle, as a means to ease developers’ cash flow strains.
The central bank’s relending program consists of cheap funding offered to lenders. It provides money worth 60% of the principal of bank loans extended to regional state-owned enterprises handpicked by local governments to purchase unsold homes at reasonable prices.
China could also consider financing tools including special sovereign bonds and special local government bonds, according to Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc.
That could exacerbate the government debt level, which soared to 56% of gross domestic product as of last year.
Lowering Mortgage Rates
China began lowering the nationwide floor of mortgage rates in 2022 and allowed localities that suffered the most declines to set their own minimum rates. Such measures have led to a drop in the average rate on newly-granted mortgages to 3.69% in the first quarter — the lowest since records began in 2009 — but failed to ignite purchase demand.
More than 40% of cities have already either lowered the mortgage rate floor or scrapped it by the end of March, according to the central bank.
“The policy relaxation is just a marginal relaxation of the credit constraints,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd. “I doubt how these measures can avert household expectations of the property outlook.”
The moves are set to further squeeze the margins of Chinese state lenders. The protracted property downturn has already thinned net interest margins and pushed up bad loans.
Chinese banks’ net interest margin dropped to a record low of 1.69% as of the end of last year, well below the 1.8% threshold regarded as necessary to maintain reasonable profitability.
“The effects will depend on whether consumers will take heart,” said Shen Meng, a director at Beijing-based investment bank Chanson & Co. If not executed well “it’s unlikely to stimulate demand and induce a structural turnaround.”
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