China Rolls Out Unprecedented Plan to Rescue Ailing Property Sector

China Rolls Out Unprecedented Plan to Rescue Ailing Property Sector
A man walks in front of unfinished residential buildings at the Evergrande Oasis, a housing complex developed by Evergrande Group, in Luoyang, China, on Sept. 15, 2021. (Carlos Garcia Rawlins/Reuters)

China’s financial regulators have issued an unprecedented 16-point plan to rescue the country’s floundering real estate market.

The People’s Bank of China and the China Banking and Insurance Regulatory Commission jointly issued the plan last week in a note to financial institutions to support real estate companies.

The policy is being seen as the most powerful support for the struggling sector so far, which includes the expansion of financing channels for real estate enterprises.

The measures state that funds for “guaranteed housing” should come from policy banks, and that various loan extensions have been granted.

As of Nov. 11, development loans and trust loans due within the next six months were allowed to be extended for one more year, the policy states.

The new policy also provides guidance on bond financing. To redeem bonds, real estate companies can negotiate with bondholders to make reasonable extensions, replacements, and other arrangements to proactively resolve risks.

‘3 Red Lines’

Due to Chinese Communist Party (CCP) leader Xi Jinping’s “Three Red Lines” policy in recent years, China’s real estate market has almost collapsed.

Xi set the regulatory guidelines in August 2020 to limit the ratio of debt to cash, equity, and assets in an attempt to rein in the highly indebted property-development sector.

Unfinished apartment buildings stand at a residential complex developed by Jiadengbao Real Estate in Guilin, Guangxi Zhuang region, China, on Sept. 17, 2022. (Eduardo Baptista/Reuters)
Unfinished apartment buildings stand at a residential complex developed by Jiadengbao Real Estate in Guilin, Guangxi Zhuang region, China, on Sept. 17, 2022. (Eduardo Baptista/Reuters)

Real estate companies such as Evergrande have continued to experience a liquidity crisis, which has spilled over to other sectors.

In addition to a large number of unfinished buildings (known as “rotten tail” buildings) and mortgage supply cutoffs, the crisis in the real estate sector directly affects local governments’ finances that rely on land sales as their main source of revenue.

Since real estate accounts for more than 25 percent of China’s gross domestic product (GDP), when it’s in crisis, the banking system is also under pressure. The regime’s “zero-COVID” measures have also further placed the Chinese economy under immense pressure.

The 16-point measures have now also loosened two of Xi’s three “red lines” for banks.

A rare “exemption clause” also has been introduced, which states, “If the newly issued matching financing is not well-formed, and the relevant institutions and personnel have done their due diligence, they can be exempted.”

Pale in Comparison to Huge Debts

However, according to public data, at least US$292 billion of domestic and overseas borrowings in China’s real estate industry will be due by the end of 2023, including $53.7 billion this year and $72.3 billion in the first quarter of next year. China analysts believe that the newly released rescue policy may not be able to ease China’s real estate crisis.

In September, house prices fell the most they have in eight years, according to the latest official data.

Citigroup estimates that the proportion of banks’ nonperforming loans related to real estate has soared to 30 percent. To avoid triggering a crisis in the real estate sector, the Chinese financial regulators issued a notice to support “the steady and healthy development of the real estate market,” which is viewed as a sign by some analysts that the CCP is trying to save the battered economy after it was hit hard by the regime’s “zero-COVID” policy.

Despite the sweeping rescue measures, China’s $2.4 trillion new housing market remains fragile, and defaults on real estate debt have surged, according to media reports.

‘Epic’ Rescue Won’t Save Chinese Economy

U.S.-based current affairs commentator Qin Pen said in his column for The Epoch Times on Nov. 15 that the sweeping policy is an “epic” real estate rescue.

He said that Chinese authorities can only save the Chinese economy by saving the real estate sector because real estate-related industries account for more than 25 percent of China’s GDP; and when the sector isn’t doing well, real estate taxes cannot replace direct industry taxes and government land sales revenue.

“However, this has also brought about a ‘policy’ dilemma,“ Qin said. ”If the rescue efforts are too strong, it will return to the past real estate economy and high debt model, which will increase economic risk. If the efforts are too little, it will not be able to change the situation that real estate developers continue to close down and the real estate industry lacks vitality.

“I personally have doubts about the effect of the Chinese government’s rescue of the market. For those people who own multiple properties in China, now is a good opportunity to make a move to sell them.”

As to the prospects of the Chinese economy, Qin said that after the CCP’s party congress, as the exiting Prime Minister Li Keqiang is already leading a “caretaker cabinet,” all he can do is stabilize the overall situation and avoid major problems in the economy.

Therefore, between now and next year’s top-level CCP meetings in March, the Chinese economy may not see a significant improvement, he said.