China Acts to Rescue Failing Real Estate Market Amid Worsening Economic Indicators

Residential buildings under construction by Chinese real estate developer Vanke in Hangzhou, in eastern China's Zhejiang province, on March 31, 2024. AFP via Getty Images

In an attempt to halt the continued decline of China’s property market, the Chinese Communist Party (CCP) introduced a support package with three new measures, including the establishment of a 300 billion yuan (US$41.5 billion) fund to purchase unsold properties. The Chinese state media applauded these measures as “epic” policy shifts.

Three Major Measures

On May 17, during a video conference on real estate work held by the CCP’s State Council, China’s central bank and financial regulatory bodies launched three major measures to support Vice Premier He Lifeng’s call for a “tough battle to address the risks of unfinished real estate projects.”

The first measure is to reduce the down payment ratio for first-time homebuyers to no less than 15 percent, and for second homes, the minimum down payment has been set at 25 percent. This marks the first time in China’s over 40-year history of commercial real estate that the down payment ratio for first-time homebuyers has been set as low as 15 percent, even lower than during the major stimulus efforts of 2008 and 2016 when the ratio was at 20 percent.

The market response to lowering the down payment ratio to 15 percent suggests that while it makes it easier for homebuyers to enter the market, it also increases their monthly mortgage payments and total loan amounts, which need to be considered alongside mortgage interest rates.

The second measure includes reducing the interest rates on housing provident fund loans and removing the lower limit on commercial mortgage rates.

According to the central bank’s notice, starting May 18, the interest rates on individual housing provident fund loans will be reduced by 0.25 percentage points, with rates for loans of up to five years and over five years adjusted to 2.35 percent and 2.85 percent, respectively. For second homes, the rates are set to no less than 2.775 percent and 3.325 percent, respectively.

Regarding the lower limit on commercial mortgage rates, China’s central bank typically sets a benchmark interest rate for mortgages, which can fluctuate slightly. Now, with the removal of this benchmark rate, banks can freely determine mortgage rates based on market competition.

Chinese state media claim that the new policy would lead to mortgage rates in most cities dropping by 0.3 to 0.4 percentage points.

The third measure involves the direct purchase of unsold properties by the CCP authorities.

Mr. He mentioned that in cities with a significant amount of unsold properties, the regime could purchase some commercial housing units for use as affordable housing. Following this, China’s central bank announced plans to establish a 300 billion yuan (US$42.2 billion) fund for refinancing loans, with an interest rate of 1.75 percent and a one-year term, renewable up to four times.

Insufficient Funds to Rescue Property Market

China’s real estate market has been in turmoil for over two years, with various policies introduced by the CCP failing to achieve the desired outcomes. The vice premier’s recent claim that the Chinese authorities can purchase some commercial housing units for use as affordable housing has become the focal point of this round of market rescue efforts.

However, data and expert analysis indicate that while the authorities aim to rescue the property market, they face the harsh reality of severe funding shortages, despite the Chinese state media’s portrayal of the policies as “epic.”

According to data from the Shanghai E-House Real Estate Research Institute, in March, the total area of new commercial residential buildings in 100 cities nationwide in China was approximately 499.16 million square meters.

The time required to sell the property inventory, known as the “destocking cycle,” varies depending on economic conditions and city tiers. The data shows that in March, the destocking cycle for new commercial residential buildings in 100 cities was 19.2 months in first-tier cities, 21.6 months in second-tier cities, and 33.1 months in third- and fourth-tier cities. Before the pandemic, in December 2019, the destocking cycle was 12.2 months, 8.9 months, and 10.2 months, respectively.

China’s Tianfeng Securities analyst Song Xuetao believes that the Chinese authorities’ plan of directly purchasing property inventory is to boost and stabilize the current market by reducing the destocking cycle to within 18 months. According to Tianfeng Securities’ calculations, achieving this goal would require approximately 7 trillion yuan (US$967.5 billion).

Additionally, Nomura Securities estimates that China has 20 to 30 million unfinished property units, and the authorities would need at least $440 billion to complete them. Arthur Budaghyan, the chief emerging markets and China strategist at BCA Research, stated that at least 5 trillion yuan (US$691 billion) would need to be injected into the troubled Chinese property market to have a significant impact on the economy.

Currently, the central bank’s plan to introduce only 300 billion yuan (US$42.2 billion) in refinancing loans is viewed as insufficient. Mike Sun, a North American investment strategist, told The Epoch Times that the so-called strongest measures in history launched by Beijing have limited effectiveness in boosting the property market.

“The [Chinese] government is burdened with debt and cannot allocate sufficient funds,” he said. “Additionally, the most critical issue is that the public, as the demand side of the property market, generally lacks confidence in the future economy, significantly reducing their willingness to purchase homes.”

Sharp Decline in Major Economic Indicators

It is worth noting that the introduction of these property market support packages by the CCP comes against the backdrop of a comprehensive decline in major economic indicators in April, with the property market continuing to face declining prices.

The CCP’s official data show that in April, China’s total social financing decreased by nearly 200 billion yuan (US$27.7 billion), marking the first decline in over 20 years. This indicates a decrease in the demand for loans and other funds by enterprises, suggesting that the economy may be entering a contraction trend. Social finance refers to the total amount of funds obtained by the real economy from the financial system within a certain period and is an important economic indicator.

Additionally, narrow money (M1), which includes money supply in circulation and corporate demand deposits, decreased by 1.4 percent year-on-year in April, indicating sluggish economic activity.

Data released by China’s National Bureau of Statistics on May 17 showed that from January to April, national real estate development investment was approximately 3.1 trillion yuan (US$428.6 billion), down 9.8 percent year-on-year. The sales area of new commercial property units decreased by 20.2 percent year-on-year, with residential property sales down 23.8 percent. The sales value of new commercial properties was 2.8067 trillion yuan (US$387.1 billion), down 28.3 percent, with residential sales value down 31.1 percent.

In April, among 70 large and medium-sized cities in China, only six cities saw a month-on-month increase in the sales prices of new commercial residential properties, five cities fewer than the previous month. The remaining 64 cities experienced a month-on-month decline, accounting for about 91 percent of the cities surveyed.

China’s Zhuge Data Research Center senior analyst Guan Rongxue stated that the downward pressure on property prices increased further in April, with a significant decrease in the number of cities with rising prices, hitting a historical low. Overall, the market prices remain depressed, and the bottoming out seems to have not yet stopped.