New Wave of Policies in China’s Property- A Soft Landing Ahead?

Authorities aim to alleviate liquidity pressure on real estate developers by purchasing existing homes and unused land, thus mitigating their risk of bankruptcy. Simultaneously, they seek to reduce borrowing costs for the public, stimulating housing demand.

Fueled by this positive development, the HK50 surged nearly 110 points on the day of the policy announcement, hitting a new high for this rally. Similarly, the CN50, highly correlated to the CSI300 and more sensitive to policy shifts in China, jumped 2% on Friday, edging closer to $12,900 at the close.

Policy Highlights: What matters?

On May 18th, policymakers announced a series of relaxed measures for the property sector, including:

• The PBoC provides 300 billion yuan in re-lending to help local governments and state-owned enterprises purchase unsold homes and unused land from developers.
• Lowering the minimum down payment ratios for first- and second-time homebuyers by 5% to 15% and 25% respectively, removing the floor on mortgage rates, and reducing the interest rate for housing provident fund loans by 0.25%.
• Establishing a long-term mechanism to meet the reasonable financing needs of projects on the "whitelist."

Given that the last two measures are more of a continuation of policies from August 2023 and January this year, the most significant change is the first item. This indicates that the authorities have pledged to act as the ultimate buyer for real estate developers using funds from the PBoC and local government special bonds.

By doing so, developers facing liquidity constraints and forced asset sales may obtain extra flows while providing more affordable housing to residents, improving the supply-demand structure. Overall, Beijing’s intention to "rescue the market" is evident.

Background and Motivations: Why is the property market on the horizon again?

Looking at the domestic market, China saw its new loans turn negative for the first time since 2005 last month, indicating weak demand for credit. In a series of economic data released last Friday, April industrial production exceeded expectations with a 6.7% YoY growth driven by electric vehicles, while fixed asset investment and retail sales saw yearly increases of 4.2% and 2.3% respectively, both below consensus.

Before introducing these stimulus policies, the outlook for the property market remained bleak. The monthly decline in the national house price index was 3.1%, and prices in major cities such as Beijing, Shanghai, Guangzhou, and Shenzhen showed MoM and YoY declines, all below market expectations, limiting investment and purchasing intentions.

It appears that China's economy continues to follow a "two-speed" recovery model, with exports and new energy driving growth while consumption and property act as drags.

On one hand, to stabilize the significantly slowed credit growth, the Ministry of Finance announced last Monday the issuance of 1 trillion yuan in ultra-long-term special sovereign bonds for infrastructure construction.

On the other hand, the Biden administration announced last Tuesday the imposition of tariffs on Chinese goods, including electric vehicles and chips. Although this only covers 0.5% of China's total exports and 4% of exports to the United States, concerns about the sustainability of exports and new energy in boosting the Chinese economy still exist.

In summary, faced with a potential slowdown in external demand and weak consumption, policymakers need to strengthen fiscal stimulus and support the property sector. This will help to achieve its 5% growth target and enhance resilience to trade protectionism.

What are the potential obstacles to policy implementation?

Whether from the supply side of developers or the demand side of home buyers, the current property stimulus measures have taken both into account. However, we have also observed that both the HK50 and CN50 experienced varying degrees of retreat after a brief surge last Friday. The short-lived effect of the positive news reflects worries about the obstacles to policy implementation.

Firstly, state-owned enterprises may lack the incentive to purchase unsold homes for affordable housing. In 2023, the average rental yield in China's tier-one cities was only 1.4%, while now the interest rate on social housing re-lending loans is 1.75%. Likely, rental income may not cover interest expenses and operational maintenance costs, challenging the effectiveness of the policy response.

Secondly, local governments are already facing significant fiscal pressures. Although the policy requires them not to increase hidden debts but to finance through special bonds, without additional subsidies, maintaining the balance of income and expenditure from housing rentals will likely seek local fiscal support. Given the already high local debt and salary cuts for local officials, it's difficult to determine whether property stimulus or further deterioration of local debt will come first.

Thirdly, banks have limited willingness to bear credit risks. While there is a 500 billion yuan fund leveraged by the central bank support, commercial banks are required to "act at their own discretion and bear their own risk" in lending. Considering the current overall downturn in the property market in terms of investment, development, completion, and sales, banks may be reluctant to lend due to credit risks.

With the 500 billion yuan fund smaller than market expectations, most people still adopt a wait-and-see attitude toward property purchases.

Policy Outlook and Key Focus

Overall, despite facing various challenges in implementation, we must acknowledge that this is a proactive attempt by Chinese authorities to boost the property market, which plays a significant role in destocking inventory, revitalizing cash flow for developers, and enhancing market confidence.

Given the increase in government bond issuance leading to fiscal expansion, although the 1-year and 5-year LPRs remained unchanged on Monday, I believe that the authorities may consider another RRR cut in the near future for liquidity management.

As for whether the property market can achieve a ‘soft landing’, I believe two factors deserve further observation:

1. The scope and scale of policy coverage directly impact whether the ultimate effect is stabilizing, stimulating, or merely providing a safety net. Additionally, the issue of mismatched cost-benefit ratios in some cities makes subsequent policy support crucial.
2. We also need to focus on the fundamentals of the Chinese economy, including unemployment, disposable income, and income expectations. Because government purchases are only temporary measures, the goal is to increase organic demand.