After a series of tentative moves during the closing months of 2023, Beijing has launched a new solution to the economy’s property crisis—if the leaks and rumors are true.
It involves what can only be described as a government takeover of residential real estate. It will involve a strong emphasis on rentals instead of homeownership and government purchases of bankrupt properties. Plans are for the Chinese Communist Party’s (CCP) role in real estate to rise to 30 percent from 5 percent at present.
Such an act will surely take the nation back to the days of Mao Zedong. If these plans can veil the property crisis for a time, they will do tremendous damage to China’s economic prospects.
All of what Xi Jinping and the CCP have planned remains unclear. Most of what the public knows has emerged from leaks and a few vague government announcements. Indeed, Beijing has admitted that it has not yet worked out all the details. It claims that it will iron them out in time.
What news is available indicates that the CCP’s “new model” seems ready to commit the equivalent of $280 billion a year for five years to buy up distressed private residential real estate developments and repurpose them as rental units. Other descriptions of the plan mention building still more units, some subsidized rentals, for a total of 6 million new units in 35 cities over the next five years. Under the program, the authorities would impose severe restrictions on who could buy such units. It would further forbid purchasers from trading their units on the open market.
Xi’s chief economic policy aide, CCP deputy leader He Lifeng, claims that the resulting enlargement of the CCP’s role would help in two ways: It would allow Beijing to control excess supply, and put a floor under residential real estate prices.
Doubts naturally attach to such ambitions. In the first place, it is far from apparent that Beijing has the financial resources to execute such plans or even the will to do so if it could find the resources. In the second place, China already has about 7 million empty housing units and a shrinking population, leaving open the question of how 6 million additional units—rentals or otherwise—will control supply or put a floor under prices.
Still, more fundamental questions about the CCP’s ability to manage real estate arise from how poorly the authorities have managed things to date. Prior to 2020, Beijing actively encouraged private residential real estate development, pushing local authorities to support such ventures and ensuring easy credit terms for both developers and homebuyers.
Private builders and speculators responded actively, taking on debt and pursuing increasingly dubious projects so that even as China was meeting its housing needs, such development reached the astronomical level of about 30 percent of China’s economy. Then, in 2020, Beijing abruptly removed all of this support. Not surprisingly, the highly leveraged and extended developers began failing soon thereafter.
Had Beijing known its business, it would have gradually removed support to give developers and buyers time to adjust. Failing that, Beijing should have acted immediately after the first of the failures among developers. Providing liquidity to financial markets could have blunted the ill effects of so much questionable debt on the books of bondholders and financial institutions.
By providing special credits to developers—not to bail them out but to enable them to complete apartments for which they had contracted and already received payment—Beijing could have saved the investments of literally millions of Chinese households who had pre-bought apartments. Such help would have bolstered the confidence of Chinese homeowners and homebuyers.
But the CCP did nothing, so financial markets, worried under so much questionable debt, did not have the resources to support adequate economic growth. The failure, especially of the buyers of these unfinished apartments, eroded public confidence in homebuying and in general. Consumer spending contracted, while the shortfall in homebuying depressed property values and, in doing so, eroded the net worth of all Chinese homeowners and further stifled confidence and consumer spending.
After two years of zero effort, Beijing, late in 2023, offered tentative and inadequate palliatives. In the opening months of 2024, it seems to have settled on a truly communist solution: a government takeover of property development and pricing control.
The CCP’s gross mismanagement of the situation so far hardly inspires confidence in its plan to direct a large portion of China’s housing stock. No doubt that the huge amounts of cash involved, if Beijing can put it to work, will cloak the immediate effects of the property crisis. Still, otherwise, these plans will hamstring China’s growth model fundamentally and perhaps permanently.
Wealth considerations hold the key to this destruction. When China first opened under Deng Xiaoping some 50 years ago, Chinese people could own their own homes for the first time in a long time. This was the underlying basis of a boom. In Chinese culture but also globally, real estate constitutes the bulwark of household wealth. The dream of amassing it in China provided great motivation for the country’s working population. And once that wealth began to grow, it encouraged spending and the use of credit, both of which spurred what turned out to be a truly outstanding pace of economic growth.
The CCP’s seeming plan to control the market and emphasize rentals threatens this engine of growth and wealth creation. Even when permitting purchases, Beijing’s plan detracts from the wealth creation by forbidding trading the new units on the open market. Practically speaking, this policy makes those units less like homeownership and family wealth and more like a rental with a very long lease.
If these plans go into effect and, still worse, if Beijing builds on them, China will face much worse economic problems in the future than it does today. Xi and his cronies in Zhongnanhai will have shut down a critical engine of economic motivation and growth.
