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China is finally trying to solve its housing crisis


More than a year after one of China’s biggest property developers began collapsing, unrest has spread to cities across the country. Dozens of other developers also defaulted on debt payments, sales of new homes plummeted and construction cranes stopped at many sites.

This week, the Chinese government, which so far has remained largely on the sidelines of the country’s real estate crash, took its strongest steps yet to try to minimize the damage from the turmoil that has enveloped China Evergrande Group. , the most indebted group in the world. developer, and many of its competitors.

Real estate development plays an outsized role in China’s economy, accounting for around a quarter of economic output and a quarter of its bank lending. Housing accounts for at least three-fifths of household assets in China, and many Chinese see apartments as the only reliable way to build wealth.

Government intervention this week took on greater urgency as Covid-19 cases hit record highs. The infections have prompted a new wave of strict shutdowns that are disrupting factories and other businesses, cutting consumer spending and preventing buyers from visiting apartment complex showrooms. This has further strained an already strained economy.

China’s cabinet on Wednesday evening called on banks, most of which are state-owned, to lend more money for the completion of unfinished apartments, following a similar directive from regulators issued hours earlier. China’s central bank, People’s Bank of China, and top banking regulator codified 16 same-day measures to ensure developers can borrow enough money from banks and bond investors, and can defer repayment if necessary. And on Friday night, the central bank slashed $70 billion from the money the country’s commercial banks are required to hold for emergencies, freeing them up to lend that money instead.

A central bank subsidiary agreed earlier this month to guarantee repayment of new bonds issued by some of the least distressed property developers, effectively assuring investors that it was safe to lend to businesses.

The Ministry of Finance has decreed tax relief for people who buy a new house within a year of selling the previous one.

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

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

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

Financial regulators in China are under pressure to restore public confidence in the property sector. Domestic and international investors sold bonds and other assets and moved money out of the country as concerns persisted over the economy, which is expected to grow barely half of Beijing’s target of 5.5. % This year. Speculation is mounting that Xi Jinping, the Chinese leader, could raise taxes on the wealthy to pay for more social spending.

Bond prices fell this fall in Shanghai, pushing yields higher and making it more expensive for developers to borrow without government assistance. Loosely 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 widespread financial strain also affecting housing.

Just as China’s health policy has been stuck in an inflexible ‘zero Covid’ stance of mass lockdowns and testing, so has China’s housing policy. Strong positions taken by Mr. Xi have complicated the resolution of the housing crisis and the Covid policy.

With exports down right now and consumer spending weak during the widespread Covid shutdowns, the economy is even more reliant on housing.

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

In housing, the crucial question is whether the government should once again tolerate people using housing investments as a way to make money, rather than just a place to live. Mr Xi proclaimed in 2016 that “housing is shelter, not speculation”, an idea that became government policy two years ago. The country’s housing ministry imposed a “three red lines” policy that put safeguards on how much developers could borrow.

The aim was to prevent developers from borrowing excessively and investing the money in speculative projects, while preventing banks from lending too much. Crossing even a single red line put pressure on the developers to start paying off their debt, which quickly put a strain on their finances.

The Housing Department left the three red lines policy in place even as at least three dozen property developers missed payments on one or more bonds, mostly foreign bonds.

China’s housing market was already inflated and could have collapsed even without the tougher policy, some analysts said, after property prices soared over the past quarter century.

Oxford Economics calculated this week that prices for newly built homes across China reached 8.5 times average household disposable income last year. In the United States, this ratio peaked at 5.8 times in 2007, before the bursting of the American housing bubble.

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

“Even if the policy direction of ‘housing is for living and not for speculation’ is correct, policy implementation may need adjustment in light of market conditions,” said Zhu Ning, vice-president. Dean of the Shanghai Advanced Institute of Finance. said.

This week’s burst of regulatory activity could mark the start of this fine-tuning.

A central bank subsidiary has begun providing guarantees for $35 billion in bonds to be issued by property developers nationwide. Government guarantees will allow promoters to sell new bonds at low interest rates to state-controlled banks.

Proceeds from the new bonds will then be used to redeem or redeem existing bonds. The aim is to alleviate the high interest charges faced by promoters.

In another of the measures released this week, China’s Banking and Insurance Regulatory Commission separately told banks they could delay the collection of interest and principal payments from property developers by a year. . This postponement allows China’s commercial banking system to avoid registering a large wave of distressed loans, which would otherwise reduce profits.

The Department of Housing has begun allowing local governments to dismantle their sweeping limits on who can buy apartments. Many cities had until now discouraged out-of-town investors from buying homes, in order to make apartments cheaper for long-term residents.

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

The tax relief, which resembles the so-called Section 1031 tax provision for U.S. real estate investors, expires at the end of next year. The aim is to encourage people with significant gains in the value of their homes to trade in for newer, larger apartments. This could help revive at least part of China’s huge construction industry.

The longer-term problem is that the vast movement of rural residents to cities that began in the 1980s has slowed as villages emptied of people, while the country’s birth rate plunged. . Oxford Economics this week estimated 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 lies in how to handle the decline of the construction industry and many associated industries, from steel and cement to furniture and washing machines.

The construction sector “needs to contract”, said George Magnus, a partner at the China Center at the University of Oxford. “The question is how and at what cost.”

Li you contributed to the research.

nytimes

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