China is finally trying to solve its housing crisis

More than a year after one of China’s biggest real estate developers began to collapse, troubles have spread to cities across the country. Dozens of other developers have also defaulted on debt payments, new home sales have plummeted and construction cranes have ground to a halt in many locations.

This week the Chinese government, which has largely stayed on the sidelines of the country’s housing crisis, took its most energetic steps yet to try to minimize the damage from the turmoil that the China Evergrande Group, the world’s most indebted have hit developers and many of its competitors.

Real estate development plays a paramount role in China’s economy, accounting for about a quarter of economic output and a quarter of bank lending. Housing accounts for at least three-fifths of household wealth in China, and many Chinese view housing as the only reliable way to build wealth.

Government intervention this week gained urgency as Covid-19 cases hit record levels. The infections have sparked a new wave of strict lockdowns disrupting factories and other businesses, curbing consumer spending and preventing homebuyers from visiting apartment complex showrooms. This has further weighed on an economy already under severe pressure.

China’s cabinet late Wednesday asked banks, most of which are state-owned, to borrow more money to complete unfinished homes, after a similar order from regulators was issued hours earlier. China’s central bank, the People’s Bank of China and the main banking regulator codified 16 measures on the same day to ensure developers can borrow enough money from banks and bond investors and defer repayment if necessary. And as of Friday night, the central bank slashed the money the nation’s commercial banks must collectively hold for emergencies by $70 billion so they can lend that money instead.

A subsidiary of the central bank earlier this month agreed to guarantee the repayment of new bonds issued by some of the less distressed real estate developers, reassuring investors it was safe to lend to the companies.

The Treasury Department has enacted a tax break for people who buy a new house within a year of selling the previous one.

China’s biggest banks this week extended lines of credit to major developers on orders from the cabinet and banking regulators. The Industrial and Commercial Bank of China announced Thursday that it has issued credit lines totaling $91 billion to 12 developers. The Bank of Communications extended a $14 billion line of credit to Vanke, China’s largest developer.

Yi Gang, the central bank governor, said the government is ready to use its policy tools to stabilize the country’s huge real estate sector.

“China’s housing sector is linked to many upstream and downstream industries, so its healthy development is of great importance to the overall economy,” Mr. Yi said in a speech on Monday.

Financial regulators in China are under pressure to restore public confidence in the real estate sector. Domestic and international investors have sold bonds and other assets and moved money out of the country amid ongoing concerns about the economy, which is expected to grow just under half of Beijing’s 5.5 percent target this year. Speculation is mounting that Xi Jinping, China’s leader, may be raising taxes on the wealthy to pay for more social spending.

Bond prices fell in trading in Shanghai this fall, pushing up yields and making it more expensive for developers to borrow without government help. Lightly regulated wealth management funds, many of which use borrowed money to place big bets in bond markets, have seen investors withdraw large sums – another sign of the broader financial pressures that are also affecting housing.

Just as China’s health policy is mired in an inflexible “zero-Covid” stance of lockdowns and mass testing, so too is China’s housing policy. Mr. Xi’s strong positions have complicated the resolution of the real estate crisis and Covid policies.

With exports currently falling and consumer spending weak during widespread Covid lockdowns, the economy is even more dependent on housing.

“Saving the real estate market means saving the economy,” Han Xiuyun, associate professor of economics at Tsinghua University, said in an online analysis.

When it comes to housing, the key question is whether the government should once again tolerate people making money from investing in housing and not just as a place to live. Mr. Xi proclaimed in 2016 that “housing is for protection, not speculation,” an idea that became government policy two years ago. The country’s housing ministry imposed a “three red lines” policy that set guard rails for how much developers could borrow.

The goal was to prevent developers from over-borrowing and pouring the money into speculative projects, while preventing banks from over-borrowing. Crossing even a red line pressured developers to start paying down debt, and it quickly took a toll on their finances.

The housing ministry has maintained the three-red-line policy, even though at least three dozen real estate developers have missed payments on one or more bonds, mostly foreign bonds.

China’s housing market was already bloated and could have collapsed even without tougher policies, some analysts believe, after home prices have soared over the past quarter-century.

Oxford Economics this week calculated that new-build home prices across China reached 8.5 times the median disposable income last year. In the United States, this ratio peaked at 5.8 in 2007, before the US housing bubble burst.

Some economists say Mr Xi was right to address speculation but that the policy response needs to be more carefully crafted.

“Even if the direction of the ‘housing is for living, not for speculation’ policy is right, policy implementation may require fine-tuning in light of market conditions,” said Zhu Ning, vice dean of the Shanghai Advanced Institute of Finance. said.

The burst of regulatory activity this week could mark the start of this fine-tuning.

A subsidiary of the central bank has begun providing guarantees for $35 billion in bonds to be issued by the country’s real estate developers. Government guarantees will allow developers to sell new bonds to state-controlled banks at low interest rates.

The proceeds of the new bonds are then used to repay or buy back existing bonds. The aim is to relieve high interest costs for developers.

In another of the measures released this week, China’s Banking and Insurance Regulatory Authority has separately told banks that they can delay collecting interest and principal payments from real estate developers by a year. This delay allows China’s commercial banking system to avoid a large spate of bad loans that would otherwise eat into profits.

The Housing Ministry has begun allowing local governments to ease their extensive restrictions on home purchases. Many cities had previously discouraged investors from outside from buying their own homes in order to make housing cheaper for long-established residents.

Finally, China’s Ministry of Finance has approved a temporary tax break to ensure investors keep their money in the real estate market. The rule states that the 20 percent tax on property gains can be avoided if the sale proceeds are reinvested in another property purchase within 12 months.

The tax break, which is similar to what’s known as the Section 1031 tax regime for real estate investors in the US, expires at the end of next year. The aim is to encourage people who are sitting on large increases in the value of their homes to trade for newer and larger apartments. That could help revitalize at least part of China’s massive construction industry.

The longer-term problem is that the great rural-to-urban migration that began in the 1980s has slowed as villages have become deserted while the country’s birth rate has fallen. Oxford Economics this week estimated that housing demand was 8 million units a year from 2010 to 2019 but would fall to just 4.6 million a year from next year to 2030.

The dilemma for Beijing is how to deal with the decline of the construction industry and many related industries, from steel and cement to furniture and washing machines.

The construction sector “needs to shrink,” said George Magnus, an associate at Oxford University’s China Centre. “The question is how and at what cost.”

Li you contributed research.

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