Beijing all along has failed to deal effectively with China’s property crisis. To begin with, China’s leadership foolishly ignored it.
For two years after the crisis broke in 2021, Beijing acted as if it was no big deal and refused to do anything to help the failing property developer Evergrande and its customers or protect Chinese financial markets from the fallout. This allowed the problem to metastasize throughout Chinese economics and finance, as other developers also failed.
The latest remedy Beijing has put forward involves the issue of 1 trillion yuan (about $140 billion) in ultra-long-term debt to put some 500 billion yuan into purchasing vacant housing and repurposing it for affordable housing.
This so-called repurchase plan aims to restore Chinese confidence in real estate investing in three ways: by putting all of China on notice that Beijing will act as a buyer of last resort; by indirectly putting financial resources at the disposal of distressed property developers; and by saving money by using already existing properties rather than building from scratch.
The effort is welcome, especially compared to Beijing’s earlier do-nothing approach. But as massive as this program looks at first blush, it is too little for the needs of the moment, much less the ambitious aims of the program. For perspective, it might help to consider that it is considerably smaller than Evergrande’s initial $300 billion failure. Beijing’s effort pales by comparison to just this, much less the failures that have taken place since, including the also immense Country Garden. Those close to the situation suggest that an effective remedy will require multiple trillions of yuan in public financing.
A still bigger problem is that the surplus housing units are not located where the affordable housing needs are. When Beijing buys units to repurpose for affordable housing, it very well may do so in cities and regions with no affordable housing shortage. Consider that the affordable housing issue is most intense in first- and second-tier cities, but the bulk of vacant units lie in smaller cities. The purchased units, however refurbished, may remain vacant, while in larger cities, much housing will remain unaffordable to working Chinese.
Indicative of this problem is the effect of low rental yields. In first- and second-tier cities, where the affordability question is most intense, the housing shortage has pushed up prices so much that rental returns, according to the property agency Centaline, fell by May of this year to barely 1.64 percent. This is lower than the rate charged on financing the resale units. Consequently, few have any incentive to participate in Beijing’s program.
This problem was already evident in the earlier pilot program conducted by the People’s Bank of China (PBOC). Of the initial 100 billion yuan the bank’s program targeted, barely 2 billion yuan has been used to this day. Sapping the potential of Beijing’s larger program still more is the reluctance of banks to get involved, not the least because they have already seen a rise in their non-performing loans.
If all this were not enough to present Beijing’s new program with a serious uphill battle, local governments in China have also shown a reluctance to get involved. Because Beijing, over the years, has forced local governments to finance a series of infrastructure projects, not all of which have paid off as handsomely as those promoting them had hoped, local governments across China face heavy debt burdens. Some face such extreme burdens that they have had difficulty providing their local populations with basic services. This problem, no doubt, is why the program’s initial financing has come through the credit of the central government. Even with that form of relief, it is easy to see why local authorities have little desire to get involved in any program that involves more debt.
The upshot is that Chinese authorities will not only have to do more to free China’s economy from the drag of the property crisis but that even the best remedies will take a lot longer than anyone in Beijing wants to make this terrible crisis a memory.
