Xi saves the Chinese economy from itself - gives $42 billion to buy back unsold apartments

18.05.2024/17/41 XNUMX:XNUMX    596

Xi Jinping's government has announced its strongest attempt yet to rescue China's beleaguered property market, easing mortgage rules and urging local authorities to buy back unsold homes as authorities grow concerned that the sector is holding back economic growth.

Bloomberg writes about it.

The support package also includes lower down payment requirements for home buyers and 300 billion ($42 billion) of central bank funding to help government-backed firms buy excess stock from developers. These objects will then be converted into affordable housing.

While investors welcomed the news - the developer's stock index rose nearly 10% on Friday - it is far from clear whether the plan will be able to weather the crisis in the real estate market. The funding announced by China's central bank is just part of what some analysts say is needed to address the housing market's supply-demand mismatch, with many potential buyers waiting for prices to fall further before jumping in.

Friday's statement, however, underscored Xi's renewed focus on propping up the world's second-largest economy, which faces a host of challenges from rising US tariffs to historically high youth unemployment. The question now is whether the authorities can muster the right mix of financial firepower and policy adjustments to build confidence without returning to the speculative excesses of previous decades.

"This is somewhat similar to the rescue of financial institutions during the Great Financial Crisis," said Zhu Ning, professor of finance at the Shanghai Advanced Institute of Finance, in an interview with Bloomberg TV. "But at the end of the day, unless central government steps in and lends its own to the property market, it's going to be a bit difficult or premature for us to think we're out of the crisis."

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The central bank estimates that the re-lending program could lead to 500 billion yuan in home loans in total, the central bank said. This is lower than analysts' estimates, which estimate the necessary financing at 1 trillion to 5 trillion yuan - depending on the scale and speed with which the government deals with the housing stock inventory.

The markets reacted positively. The real estate index of the Shanghai Stock Exchange rose by 6,2%. The Bloomberg China Developers Index jumped 9,6% to 16,8% this year.

It marks a new stage in Beijing's stance on property, seven years after Xi dictated that "homes are for living, not for speculation". The latest measures, potentially easing pressure on developers, will speed up Xi's plans to increase public housing.

Vice Premier He Lifeng stressed during a meeting with government officials on Friday that "the real estate sector is linked to the interests of the masses and the broader issue of economic development."

He also emphasized the need to promote the so-called "three big projects", which include affordable housing, urban reconstruction and public infrastructure.

On Friday, the central bank lowered the minimum down payment for home buyers to 15%, a record low, according to Yang Yuejin, director of research at the China E-house Research and Development Institute. Second home buyers now have to put down 25%, with both moves representing a 5 percentage point reduction.

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Each city will still need to decide on mortgage rates after the national minimum has been lifted. Local authorities can decide whether to maintain a minimum mortgage rate and at what level.

More than three years after China imposed strict limits on developer debt, property companies, including state-backed China Vanke Co, are on edge. Together, they defaulted on $124 billion. This threatens social stability as protests grow and the number of unsold homes hits an eight-year high.

Due to the stoppage of construction work and the default of developers, about 5 million people were at risk of unemployment or reduced income. Images of empty building sites and unfinished public works have become global symbols of falling confidence in the country and dissatisfaction with Xi's handling of the economy.

Policymakers are feeling a sense of urgency as official data released on Friday showed that house prices in April recorded their steepest monthly fall in a decade. Many measures taken last year could not stop the fall in prices.

Vice Premier He also said local governments should buy back or recall plots of land that have been sold but remain idle to ease pressure on developers' cash flows.

The central bank's refinancing program consists of cheap financing offered to creditors. It provides money in the amount of 60% of the principal amount of bank loans granted to regional state-owned enterprises selected by local authorities to purchase unsold housing at reasonable prices.

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China began lowering its nationwide minimum mortgage rates in 2022 and allowed localities hardest hit by the fall to set their own minimum rates. Such measures pushed the average rate on new mortgages down to 3,69% in the first quarter – the lowest since monitoring began in 2009 – but failed to stimulate buying demand.

According to the central bank, by the end of March, more than 40% of cities had already either reduced the lower limit of mortgage rates or canceled them.

"Easing policy is only a modest easing of credit constraints," said Raymond Yong, chief economist for Greater China at Australia & New Zealand Banking Group Ltd. "I doubt that these measures can change the expectations of households about the prospects of the real estate market."

These moves are aimed at further reducing the profitability of China's state-owned lenders. The prolonged decline in the real estate market has already led to a reduction in net interest margins and an increase in the number of non-performing loans.

Chinese banks' net interest margins fell to a record low of 1,69% at the end of last year, well below the 1,8% threshold considered necessary to maintain reasonable profitability.

"The consequences will depend on whether consumers take heed," said Shen Meng, a director at Beijing-based investment bank Chanson & Co. If this is not done properly, "it is unlikely to stimulate demand and cause structural adjustment."