Latest Breaking News & Hot Updates Around USA OR All Over World

China is finally trying to solve its housing crisis

0 37

More than a year after one of China’s largest real estate developers began to collapse, cities across the country are in trouble. Dozens of other developers have also paid off debts, sales of new homes have plummeted and construction cranes are at a standstill in many locations.

This week, China’s government, which has so far largely been on the sidelines of the country’s housing crisis, took the strongest steps yet to minimize the damage stemming from the turmoil that has left the China Evergrande Group, the largest indebted in the world, has enveloped. developer and many of its competitors.

Real estate development plays an outsized role in China’s economy, accounting for about a quarter of economic output and a quarter of bank borrowing. Housing accounts for at least three-fifths of household wealth in China, and many Chinese view apartments as the only reliable way to build wealth.

This week’s government intervention grew more urgent as Covid-19 cases hit record levels. The infections have sparked a new wave of strict lockdowns that are disrupting factories and other businesses, reducing consumer spending and deterring homebuyers from visiting the showrooms of apartment complexes. This has put further strain on an economy that is already under severe strain.

China’s cabinet late Wednesday called on banks, most of which are state-owned, to borrow more money for the completion of unfinished apartments, following a similar directive issued hours earlier by regulators. China’s central bank, the People’s Bank of China, and the main banking regulator on the same day codified 16 measures to ensure that developers can borrow enough money from banks and bond investors, and delay repayment if necessary. And on Friday night, the central bank cut the money that the country’s commercial banks collectively must hold for emergencies by $70 billion so they can lend that money instead.

A central bank affiliate agreed earlier this month to guarantee the repayment of new bonds issued by some of the less distressed real estate developers, essentially assuring investors that it was safe to bet on the companies. to lend.

The Ministry of Finance has introduced a tax break for people who buy a new home within a year of selling the previous one.

At the behest of the cabinet and banking regulators, China’s largest banks this week extended credit lines to major developers. The Industrial and Commercial Bank of China announced Thursday that it has issued lines of credit totaling $91 billion to 12 developers. Bank of Communications issued a $14 billion line of credit to China’s largest developer Vanke.

Yi Gang, the governor of the central bank, stated that the government was ready to use its policy tools to stabilize the country’s huge real estate sector.

“China’s housing sector is connected to many upstream and downstream industries, so healthy development is of great importance to the overall economy,” Yi said in a speech on Monday.

Financial regulators in China are under pressure to restore public confidence in the real estate sector. Domestic and international investors have sold bonds and other assets and moved money out of the country as concerns persist about the economy, which is expected to grow by barely half of Beijing’s target of 5.5 percent this year. There is growing speculation that Xi Jinping, China’s leader, will raise taxes on the wealthy to pay for more social spending.

Bond prices fell during Shanghai trading this fall, boosting yields and making it more expensive for developers to borrow without government support. Lightly regulated asset management funds, many of which use borrowed money to place big bets on bond markets, have seen investors withdraw large sums – another sign of the broad financial constraint that is also hitting homes.

Just as China’s health policy has become mired in a rigid “zero Covid” attitude of lockdowns and mass testing, China’s housing policy is also mired. Strong views of Mr. Xi have complicated the solution of the housing crisis and covid policies.

With exports currently falling and consumer spending weak during widespread Covid lockdowns, the economy is even more reliant on housing.

“Saving the real estate market is saving the economy,” said Han Xiuyun, an associate professor of economics at Tsinghua University, in an online analysis.

In housing, the crucial question is whether the government should once again tolerate people using investment in housing as a way to earn money, rather than simply as a place to live. Mr Xi had proclaimed in 2016 that “housing is for shelter, not speculation”, an idea that became government policy two years ago. The country’s housing ministry imposed a “three red lines” policy that imposed a guardrail around how much developers could borrow.

The aim was to prevent developers from borrowing excessively and putting the money into speculative projects, while also restricting banks from lending too much. Crossing even one red line put pressure on developers to start paying back debt, and that soon strained their finances.

The Department of Housing has maintained the three red lines policy even as at least three dozen real estate developers have withheld payments on one or more bonds, mostly foreign bonds.

China’s housing market was already inflated and would have collapsed even without the tougher policies, some analysts believe, after house prices surged over the past quarter century.

Oxford Economics calculated this week that prices for new homes across China reached 8.5 times median disposable household income last year. In the United States, that ratio peaked at 5.8 times in 2007, before the US housing bubble burst.

Some economists say Mr Xi was right when he addressed speculation, but that the policy response needs to be more carefully crafted.

“While the direction of the policy of ‘housing is for living, not speculation’ is correct, in light of market conditions, the implementation of the policy can be more finely tuned,” said Zhu Ning, the deputy dean of the Shanghai Advanced Institute or Finance, said.

This week’s burst of regulatory activity could be the start of that fine-tuning.

A central bank branch has begun issuing guarantees for $35 billion in bonds to be issued by the country’s real estate developers. Government guarantees allow the developers to sell new bonds at low interest rates to the state-controlled banks.

The proceeds from the new bonds are then used to repay or buy back existing bonds. The goal is to alleviate the high interest burden developers face.

Among another of the measures released this week, the China Banking and Insurance Regulatory Commission separately told banks they can delay collecting interest and principal from real estate developers for a year. That delay allows China’s commercial banking system to avoid a major wave of problem loans that would otherwise weigh on profits.

The housing ministry has begun allowing local governments to dismantle their extensive restrictions on who can buy apartments. Many cities had until now discouraged out-of-town investors from buying homes to make apartments cheaper for long-term residents.

Finally, China’s Ministry of Finance has approved a temporary tax credit to ensure investors keep their money in the real estate market. The rule says that the 20 percent tax on profits from property sales can be avoided if the proceeds from the sale are invested in another property purchase within 12 months.

The tax break, which resembles the so-called Section 1031 tax provision for real estate investors in the United States, expires at the end of next year. The goal is to encourage people who are sitting on big gains in their home’s value to move on to newer and larger apartments. That could help revive at least some of China’s massive construction industry.

The longer-term problem is that the massive relocation of rural residents to cities, which began in the 1980s, has slowed down as villages are depopulated, while the country’s birth rate has fallen. Oxford Economics estimated this week that housing demand was 8 million homes a year from 2010 through 2019, but would drop to just 4.6 million a year from next year through 2030.

The dilemma for Beijing lies in dealing with the decline of the construction sector and many related industries, from steel and cement to furniture and washing machines.

The construction industry “needs to shrink,” said George Magnus, a fellow at the China Center at the University of Oxford. “The question is how and at what price.”

Li you contributed research.

Leave A Reply

Your email address will not be published.