China has finally revealed its real estate rescue plan. It will be enough?

With the announcement of a RMB 300 billion ($41 billion) fund to support government purchases of unsold homes, the Chinese government last week appeared to finally unleash major firepower to confront a three-year slowdown. in the country’s real estate market.

But while the new measures may mark a turning point in a crisis that has weighed heavily on China’s economy, analysts and economists said the hundreds of billions of renminbi were not enough.

“This is a drop in the ocean given the magnitude of the unsold stock,” said Harry Murphy Cruise, an economist at Moody’s Analytics.

Goldman Sachs estimated last week that on a cost basis, China has 30 trillion yuan in unsold housing inventory, spanning land and completed apartments, equivalent to 10 times the amount sold last year.

While estimates of China’s unsold housing stock vary, they typically dwarf the financing revealed by the People’s Bank of China on Friday. The money is intended to be lent through banks to help local state-owned companies buy unsold properties, which could then be used as social or affordable housing.

“No matter how you look at it, it looks like the size and scale of the problem is much larger than at least what we can see (from) the central government’s committed funding,” said Hui Shan, Goldman’s chief China economist. Sachs. “The math (shows) there is an oversupply problem in the housing market.”

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After decades of breakneck expansion, China’s vast real estate sector ground to a halt in 2021 after major private developers like Evergrande ran out of cash. A year earlier, Beijing, fearful of an overheated property market, had imposed restrictions on leverage in the sector.

Since then, the most secure and state-linked developers have been caught up in the slowdown and confidence has failed to recover.

Beijing has responded mainly by encouraging the completion of unfinished residential projects, which are typically purchased in advance in China.

His new measures released Friday, which also included eliminating minimum mortgage rates and reducing down payments for first-time homebuyers, reflected the need to more urgently resurrect the market that for decades had anchored economic growth and wealth. homes in China.

But the move underscored the same caution that led policymakers several years ago to rein in expansive private developers amid fears of development overheating.

“This is not like the great financial crisis where the Federal Reserve goes out and buys up all the troubled assets of financial institutions,” said Leonard Law, senior credit analyst at Lucror Analytics in Singapore. “What China is trying to do is much more specific,” because “it still has to combat moral hazard and be careful not to re-inflate the bubble.”

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At a press conference in Beijing on Friday, the term “marketization,” a common refrain referring to the need for market-oriented principles in policymaking, was mentioned 15 times.

Such principles, Law said, were evident in all the measures Beijing took during the housing crisis and ultimately meant that the approach “has to be profitable or at least not generate losses for any government entity that is providing support.” .

Policy measures taken in the past, including the disclosure of state bank credit lines for developers, have failed to restore confidence.

Analysts at Morgan Stanley said the new measures “strike a good balance between providing some protection while letting the housing cycle run its course without widening risks for local state-owned businesses and banks.”

But falling prices have imposed an increasingly pressing financial risk during the three-year housing slowdown. New home prices in April fell at the fastest monthly pace in nine years.

And Goldman Sachs estimated that, in addition to the unsold housing stock, there were between 90 and 100 million “shadow supply” units in China that were often purchased as investment properties and had not been lived in.

“China’s financial system is largely driven by banks and bank loans are largely collateralized by real estate in one form or another,” said Goldman Sachs’ Shan. “That could be one reason why they think it’s important to put a floor on prices.

“I think this is perhaps the beginning of a new approach,” he added. “If they find that prices continue to fall and sales are not increasing, I imagine central government will have to increase the funding they are providing.”

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UBS has estimated that, based on inventory in 35 major cities, it would cost the government up to 2.4 trillion yuan to reduce the excess inventory of completed but unsold homes to normal levels.

UBS chief China economist Tao Wang said that while the People’s Bank of China figure was lower, the policy direction was encouraging. “We think this is probably a starting point and we think it will probably require more, but it’s not clear how much more,” he said at a news conference Monday.

It added that the measures would not affect its forecast for GDP growth of 4.9 percent this year. “We really don’t expect much recovery or growth” in the housing market this year, he said. “We’re just looking for stabilization.”

Long before Friday’s announcement, the government said it would increase social housing as part of a broader push for redistributive policies. Under its 14th five-year plan, unveiled in 2020, Beijing pledged to provide 6.5 million government-subsidized rental housing units in 40 cities.

Karl Choi, head of Greater China real estate research at BofA Global Research, said the new measures could “kill two birds with one stone.”

“We in the markets were thinking, there is already too much excess supply, why would they build more social housing?” he said.

He added that the push for affordable housing was related to upper-tier cities with population influxes.

The on-lending service “wasn’t huge, but it wasn’t insignificant either,” Choi said, noting its potential use in Tier 2 cities.

In lower-tier cities, where many developers expanded aggressively in search of higher margins, the relevance of social housing is less clear.

“We need to recognize that the government will not be able to buy all the inventory,” Shan said. “They will have to make an effort to buy selectively in certain cities and design the program to achieve their political objectives. Whatever they are doing now is grossly insufficient.”

Additional reporting by Wenjie Ding in Beijing