Beijing’s Unusual Plan to Stabilize Housing Market Has Risky Consequences

A building under construction is seen in Shanghai on Sept. 24, 2021. (Hector Retamal/AFP via Getty Images)

Commentary

As China’s economy continues to spiral downward, the Chinese Communist Party (CCP) has initiated a significant plan for the government to buy back unsold homes from developers and repurpose them as affordable housing.

This measure is apparently aimed at stabilizing housing prices and mitigating the economic impact of falling real estate prices. Funding for this buyback is expected to come from long—or ultra-long-term government bonds.

However, questions remain as to whether this approach can truly revive China’s economy and what the impact of such long-term government debt will be on Chinese society.

A Hasty Action

On the May 23 episode of “Pinnacle View,” Independent TV producer Li Jun said that the CCP rushed to introduce the new policy because property sales in the first four months of 2024 were quite dismal.

“On May 17, Chinese Vice Premier He Lifeng announced during a national video conference that local governments in cities with high inventories of new homes can purchase unsold properties at reasonable prices to stabilize housing prices. He stated that these properties would be converted into affordable housing. This announcement follows earlier hints from informed sources who revealed to the Chinese media that the details of this plan were still under discussion and could take several months to finalize. The urgency of the announcement in May is likely due to the poor performance of the property market in the first four months of the year, with sales falling by approximately 47 percent,” he said.

According to Mr. Li, affordable housing in China was first introduced in 2007 but was not implemented for a long time. This is because local governments relied heavily on revenue from land sales and real estate taxes, making them reluctant to pursue policies that might undermine these income sources. It wasn’t until 2017 when the CCP leader Xi Jinping emphasized that “housing is for living, not for speculation,” that the policy began to take shape. By 2021, plans were in place to build hundreds of thousands of affordable housing units, but this was still a small fraction compared to the 18 million units sold that year.

According to the new affordable housing policy, it focuses primarily on affordable rental housing.

From 2021 to 2025, the plan is to build 8.7 million units of affordable rental housing nationwide, with rental units accounting for 80 percent of the total. This is in line with an earlier statement by Cao Jinbiao, director of the Housing and Urban-Rural Development Ministry’s Housing Security Department, who noted that from 2021 to 2025, new affordable rental housing should account for 30 percent of the total new housing supply. In major cities such as Shanghai and Guangzhou, this proportion is expected to reach 40-45 percent or even higher.

“In the future, the biggest real estate company in China may be the local government,” Mr. Li said. “The rules of the game have changed. This is really a big move. In the short term, it may help to clear out the inventory of real estate companies. But in the long run, this may also be the last order for many real estate companies, and in the next period of time, the norm would be for state-owned enterprises to build houses and the government to rent houses.”

Insufficient Government Funds

Guo Jun, president of the Hong Kong edition of The Epoch Times, said on “Pinnacle View” that China’s real estate crisis is the CCP’s biggest headache, and it must take measures to stop the further deterioration of the property market.

“China’s economy is deeply intertwined with its real estate sector, which accounts for approximately 30 percent of the country’s GDP. The decline of the real estate industry significantly impacts the overall economy. It even triggered a local government debt crisis,” she said.

Ms. Guo went on to say that the CCP’s current measures aim to address these challenges in three main ways:

“First, by purchasing houses from developers, the government provides developers with much-needed capital to alleviate financial strains and reduce corporate debt. This also allows buyers of pre-sold properties to receive their homes, easing social tensions that arise from undelivered housing projects.

“Second, using purchased properties as collateral. The government can mortgage the bought-back properties to banks to secure loans, addressing the issue of banks having high deposits but low lending. This helps maintain bank profitability and reduces financial pressures.

“Third, stabilizing home prices. The government aims to support property market prices through these buybacks, attempting to mitigate the decline in asset values. This is similar to major shareholders repurchasing stock to support stock prices, ultimately hoping to extract more funds from the market in the future.”

She believes that while these measures have potential benefits for the economy, there are concerns about their effectiveness. The primary issues are the source of the large funds required for these buybacks and whether these measures can genuinely stabilize housing prices.

“The key is the scale of the government buyback,” Ms. Guo said. “Currently, local governments are financially strained and heavily indebted. The central government has pledged an initial 300 billion yuan for this effort, with Suzhou alone requiring 25 billion yuan. This amount is clearly insufficient nationwide.”

She calculated the cost of buying back the unsold homes on the market in detail.

“China has 7.4 billion square meters of newly constructed housing awaiting sale and 6.7 billion square meters (72 billion square feet) under construction. In the first four months of this year, 2.9 billion square meters were sold. If the government aims to purchase 80 percent of the real estate market’s backlog over a few years at an average price of 9,420 yuan (about $1,300) per square meter, based on Q1 2024 prices, it would need 50 trillion yuan (about $6.9 trillion). This translates to 10 trillion yuan ($1.3 trillion) annually over five years.”

Ms. Guo also cited China’s official financial figures to illustrate her point.

“For 2024, the central government’s deficit is 3.34 trillion yuan (about $470 billion), with a local deficit of 720 billion yuan (about $101 billion), ultra-long-term special national bonds at 1 trillion yuan (about $140 billion), and new local government special bonds totaling 3.9 trillion yuan (about $548 billion). The broad money deficit stands at 8.96 trillion yuan (about $1.2 trillion). The funds required for the buyback far exceed the government’s annual deficit.

“Even if the government opts to buy only 10 percent of the backlog, it would still need 1.2 trillion yuan ($169 billion). However, purchasing just 10 percent would not stabilize current real estate market prices.”

May Lead to Hyperinflation and Economic Regression

In her view, the CCP’s new plan may be another failure.

“Full implementation would require 3 to 5 trillion yuan (about $422-703 billion) annually, far in excess of the proposed 1 trillion yuan (about $140 billion) in ultra-long term government bonds. This massive additional debt essentially amounts to excessive money printing, exacerbating the Chinese government’s already substantial currency issuance, which is 1.6 times that of the United States. Such excessive issuance could trigger severe inflation. China’s currency used to be anchored to the dollar, GDP growth, and export data. Now, it’s increasingly based on government credit, untethered from actual economic data, which will undoubtedly lead to hyperinflation. If the housing market continues to decline despite these efforts, asset values will continue to fall, the real exchange rate of the yuan will plummet, and the economy may regress. Therefore, this plan is very risky,” she said.

Homeowners May Be Converted to Renters

Hu Liren, a former Shanghai entrepreneur now residing in the United States, said on the show that China may go back to the 1980s when all real estate was government property, and all people were effectively tenants.

In China, every piece of land is owned by the state, but a so-called “homeowner” has a “land use right” that allows him or her to use the land for 70 years.

“This is a premeditated plan by the CCP,” Mr. Hu commented. “When the 70-year lease expires, the property will revert to state ownership, and the resident will be transformed from an owner to a tenant paying rent to the government.”

He believes that Xi’s emergence and the current collapse of the real estate sector are not coincidences, as they are the inevitable fate of a communist system.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.