Chinas Bold Move To Rescue Its Housing Market: Will It Work?

China Unveils Major Property Rescue Plan—But Is It Enough to Revive the Sector?

As China grapples with a prolonged downturn in its real estate market, the government has launched a substantial intervention to breathe life back into the beleaguered sector. Last week, Beijing introduced a Rmb300 billion ($41 billion) fund designed to enable state-owned enterprises to purchase unsold housing stock. While this move represents a significant step in addressing the three-year slump, experts remain skeptical about its adequacy.

A Drop in the Ocean: The Scale of the Crisis

The enormity of China’s real estate crisis is reflected in the staggering Rmb30 trillion worth of unsold housing inventory, as estimated by Goldman Sachs. This inventory includes both land and completed apartments, overshadowing the newly announced fund. “This is a drop in the ocean given the scale of unsold stock,” remarked Harry Murphy Cruise, an economist at Moody’s Analytics.

The primary goal of the fund is to support the purchase of unsold properties by local state-owned enterprises, which could then be repurposed as social or affordable housing. Despite the apparent financial muscle behind this plan, analysts like Hui Shan, chief China economist at Goldman Sachs, highlight the discrepancy between the allocated funds and the actual scale of the problem. “The math shows there is an oversupply problem in the housing market,” Shan noted.

From Boom to Bust: The Decline of China's Property Sector

China's property market, once a powerhouse of economic growth, has been in decline since 2021 when prominent developers such as Evergrande faced severe liquidity crises. The situation was exacerbated by Beijing’s earlier measures to curb leverage in the real estate sector, leading to a sharp slowdown.

Efforts to revive the market have primarily focused on ensuring the completion of unfinished residential projects, often pre-sold in China. The recent measures, which also include the elimination of minimum mortgage rates and reduced down payments for first-time homebuyers, underscore the urgent need to restore confidence in a sector that has long underpinned economic growth and household wealth.

Caution and Market Principles: Beijing's Strategic Approach

China's approach to this crisis is markedly different from the aggressive tactics employed during the global financial crisis. Unlike the Federal Reserve’s comprehensive buyout of troubled assets, China’s strategy is more targeted, aiming to mitigate moral hazard and avoid reinflating a housing bubble. Leonard Law, senior credit analyst at Lucror Analytics, emphasized that China’s measures must be profitable or at least non-loss-making for the supporting government entities.

This strategic caution was echoed during a recent press conference in Beijing, where the term “marketisation” was frequently mentioned. This approach aligns with Beijing’s broader policy principles, focusing on sustainable and market-oriented solutions rather than expansive bailouts.

Challenges and Risks: A Path to Stabilization

Despite the new measures, falling home prices continue to pose significant financial risks. April saw the fastest monthly decline in new home prices in nine years. Goldman Sachs also pointed to an additional 90 million to 100 million units of “shadow supply”—investment properties that remain unoccupied.

The heavy reliance of China’s financial system on real estate as collateral for bank loans further complicates the situation. Shan of Goldman Sachs suggests that stabilizing prices might be essential to prevent broader financial instability. “This could be the beginning of a new approach,” she speculated, hinting at the possibility of increased government funding if current measures prove insufficient.

UBS estimates that reducing the excess inventory in China’s largest cities to normal levels would require up to Rmb2.4 trillion, far surpassing the current fund. UBS chief China economist Tao Wang views the current policy as a starting point, potentially leading to more substantial interventions if necessary.

Long-Term Strategies: Social Housing and Market Dynamics

China’s latest efforts also align with its broader policy goals of increasing social housing. Under its 14th five-year plan, Beijing aims to provide 6.5 million government-subsidized rental homes in 40 cities. Karl Choi, head of Greater China property research at BofA Global Research, sees this as an opportunity to address both oversupply and the need for affordable housing, particularly in higher-tier cities experiencing population growth.

However, the applicability of these measures varies across different city tiers. While tier-2 cities may benefit from the relending facility, lower-tier cities—where many developers have aggressively expanded—might see less impact.

Conclusion: An Inadequate but Necessary Step

In summary, China’s new property rescue plan represents a critical but insufficient effort to address the extensive challenges facing its real estate sector. While the fund is a welcome intervention, the scale of the problem demands more significant and sustained efforts. The government’s cautious approach aims to balance immediate relief with long-term stability, but whether these measures will be enough to stabilize the market and restore confidence remains to be seen. As the situation evolves, further government action may be inevitable to prevent deeper economic repercussions.