Analysts Doubt Efficacy of China’s US$43.5 Billion Housing Initiative

• 14 July 2024
• International News
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China’s latest US$43.5 Billion housing initiative targets the country’s vacant property crisis, but analysts argue it’s insufficient to resolve the ongoing issues that have plagued the sector for nearly three years. The initiative, announced last Friday, aims to fund bank loans for state companies to purchase unsold housing stock, but concerns remain about the measure’s limited scale and potential implementation challenges, according to Asia.nikkei.com, June 26, 2024.

Recent months have seen a sharp decline in new home sales in China, with buyers increasingly favouring the secondary market. This trend has led to a significant increase in unsold homes and empty land, discouraging new construction and heightening the risk of defaults by developers, including large state-owned firms.

Officials noted that the central bank programme could incentivise bank loans worth up to $72.5 billion, but this only addresses a fraction of the value of vacant apartments in China, which economists estimate at several trillions of yuan. Rory Green, chief China economist at TS Lombard, remarked that the facility is “well short” of what is necessary to alleviate financial strains among developers.

The programme, backed by President Xi Jinping’s economy czar, requires local governments to convert the acquired apartments into affordable housing. Nevertheless, doubts persist about whether banks will fully utilise the facility. Commercial lenders’ involvement may “limit the speed and efficacy of fund deployment,” Green said. A previous PBoC lending programme for rental housing projects saw only 2% of the funds utilised, raising concerns about the success of the new initiative.

The destocking initiative has been trialled in eight cities and proved most effective in areas with population inflows – a condition not met by all metropolises. Goldman Sachs Group Inc economists, led by Lisheng Wang, noted that significantly more funding would be required for any substantial easing measures, estimating that returning outstanding housing inventory to 2018 levels would necessitate US$1.12 trillion (7.7 trillion yuan).

A related programme encouraging local governments to purchase unused land from developers also faces hurdles. Many regions are financially strained, and officials have warned against increasing local-government debt risks. While regional authorities can use part of their annual US$565.2 billion (3.9 trillion yuan) bond borrowing quota for this initiative, much of it is already allocated for infrastructure projects.

Adam Wolfe, an emerging markets economist at Absolute Strategy Research, questioned whether local governments would be willing to pay prices close to what developers initially paid for the land, adding that developers might need to recognise losses on their land banks, leading to potential solvency issues.

To ensure the completion of existing projects, officials are reinforcing the “white list” effort, identifying developments that merit support. This plan, introduced in January, has seen approved lending exceed US$130.4 billion (900 billion yuan). However, analysts remain sceptical about the overall impact of these measures on resolving China’s housing crisis.

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