China has initiated a housing market bailout amid significant economic challenges, including the collapse of major real estate developers, deflationary pressures, and social unrest, prompting increased easing efforts and policy solutions to stabilize the sector.

We and many others said that this experiment was doomed and that all China was doing was delaying the inevitable bailout of the property sector with another metric aspect of new debt when China first launched its latest “deleveraging” campaign more than four years ago. At the time, the campaign was aimed at controlling the deflation of the nation’s housing bubble, which coincidentally was the single largest asset for China’s massive middle class. We were correct, as the news from overnight proved, but not before China witnessed the collapse of all of its biggest domestic real estate developers, send its housing market into a deflationary tailspin from which it has yet to recover, and endure five years of economic stagnation and extreme social unrest.

What then transpired?

Chinese officials released a new set of easing measures for the housing market on Friday. These policies include:

1. clear top-down guidance for local governments to purchase existing housing inventory for public housing provision,
2. an RMB300bn re-lending quota for destocking the housing market,
3. reductions in downpayment ratios and mortgage rates,
4. more policy support to secure the delivery of pre-sold homes.

Of course, buying existing housing inventory by local government—which is essentially just an extension of the federal government—is nationalization, to use a more accurate term. As Goldman notes in its post-mortem (pdf available to pro subs) if done on a large scale, this approach can help stabilize home sales, prices, and completions, but it would have little effect on new starts and land purchases.

Additionally, while lower mortgage rates and downpayment ratios may help increase home sales to some extent, this time around the pace of the reductions in effective mortgage rates may have been limited by bank net interest margins. Furthermore, the scale of the reductions in downpayment percentages was rather moderate.

Overall, Goldman anticipates further housing-easing initiatives in the future, particularly on the demand side, and believes that financing and execution are essential to any strategy aimed at saving the real estate market. In addition to the RMB300 billion lending quota, possible funding sources for housing destocking include commercial bank loans, policy bank bonds, local government special bonds (LGSB), and pledged supplemental lending (PSL) from the PBOC. It will be important to keep a careful eye on upcoming policy developments, particularly with regard to measures to relieve financing and implementation difficulties.

1. What’s new today? Chinese officials have greatly increased their easing efforts to support the stabilization of the real estate sector, both in terms of money and policy solutions, since the April Politburo meeting. Today, May 17, a number of new housing-easing initiatives were announced:

• At a video conference today on securing home completions, Vice Premier He Lifeng was required to clearly understand the people nature (“人民性”) and political nature (“政治性”) of real estate work and called for more forceful policy measures to secure the delivery of pre-sold homes and digest unsold commodity housing. He specifically mentioned that for cities with high housing inventory, local governments can purchase part of commodity housing to convert into public housing, based on the local situation and at reasonable prices. He required continued policy efforts on the risk disposal of property developer debt, and the “Three Major Projects” for the property sector (i.e., urban village renovation, public housing provision, and emergency public facilities).
• At the State Council press conference this afternoon, a PBOC spokesman announced an RMB300bn re-lending program to support local government purchase of existing housing inventory and converting it into public housing (“保障性住房再贷款”). The re-lending interest rate will be set at 1.75%, and the tenor will be 1yr, eligible for rolling over four times if necessary. As banks will receive re-lending funds amounting to 60% of the principal of their loans to qualified projects, PBOC expects the RMB300bn re-lending quota to support RMB500bn in bank lending for housing destocking. On the implementation, PBOC highlighted that local governments should appoint local SOEs as agents to purchase housing inventory, but these agents should not engage in local government implicit debt (LGFVs are not qualified). Housing inventory purchase eligible for the re-lending support should be completed but unsold commodity housing, per the PBOC’s requirement.
• According to the PBOC’s announcements released today, the nationwide floor for mortgage interest rates will be removed, implying local governments have more discretion to lower their local effective mortgage rates if needed. If there is any major change in the supply-demand dynamics of the property market, PBOC would consider resuming the nationwide floor for mortgage rates. PBOC also lowered the minimum down-payment ratio by 5pp, to 15% for first-time buyers and to 25% for second-home buyers. Housing provident fund loan rates will also be lowered by 25bp, effective 18 May.
• National Financial Regulatory Administration (NFRA) pledged to support property projects in the “whitelist” through both new loan issuance and existing loan extensions, with due risk management. Ministry of Housing and Urban-Rural Development (MOHURD) required local governments to push forward the implementation of “whitelist” projects, and commercial banks to increase lending to these projects.

2. Why right now? Property headwinds remain significant notwithstanding the previous set of housing softening measures: new house sales have been roughly 30% below year-ago levels in recent months.

April saw a further decrease in secondary property prices, but the housing inventory has remained high.

… and certain private developers (like Vanke and Agile) still deal with difficult financing situations. Here, Goldman says that “recent developments suggest to us that the prolonged property sector weakness has likely breached policymakers’ pain threshold, pushing them to step up housing easing and to shift the strategic focus towards digesting existing housing inventory.”

3. The potential impact is multifaceted. If local governments purchase existing housing inventory on a large scale, it could stabilize home sales, prices, and consumer sentiment in the housing market. This action might also improve funding conditions for property developers to some extent, facilitating home completions and rebalancing the property sector. However, the boost to new starts and investment may be limited due to tight funding conditions for property developers, driven by factors such as declining new home sales and potential price discounts during local government housing purchases. Additionally, the policy priority on ensuring completions could result in less funding for land purchases and new starts.

Lower downpayment ratios and mortgage rates could increase home sales to some degree, with a notable impact observed in previous instances (a 10-percentage-point cut to downpayment ratio raising sales by around 7%). However, the reduction in downpayment ratios this time was relatively small, and the pace of cuts to effective mortgage rates might be constrained by bank net interest margins. Moreover, policymakers seem focused on preventing significant risk spillovers from the property sector to the banking sector and the broader economy. While there is a recognition of the importance of maintaining stability, policymakers do not appear inclined to transition the property sector from a growth drag to a growth driver, given the emphasis on high-quality growth. The People’s Bank of China’s emphasis on a potential exit mechanism for effective mortgage rate cuts underscores this perspective.

4. Recent examples from local pilot programs provide insights into the potential effectiveness of such initiatives. While certain cities like Chongqing and Jinan have already implemented pilot programs aimed at clearing excess housing inventory with state funding, these initiatives have thus far been relatively small in scale. However, recent pilot programs, such as those in the Lin’an district of Hangzhou city, suggest that local governments are becoming more proactive in purchasing small and medium-sized housing units with low completion risk, particularly in large cities experiencing net population inflows.

For instance, Lin’an district has announced specific details of its pilot program. It plans to cap the total floor space purchased at 10,000 square meters and targets completed or nearly completed housing units with floor space not exceeding 70 square meters per unit. Importantly, the purchase price will not exceed comparable market rates, and the initiative will cover both housing units and parking spots on an entire building basis. These recent developments indicate a growing willingness among local governments to intervene in the housing market to address inventory imbalances and promote stability.

5. What lies ahead in the housing market? Anticipate further easing measures, particularly on the demand side, with funding and execution being crucial for the success of the property rescue plan. Regarding funding, a recent analysis by Goldman Sachs suggests that any significant easing measures, including those aimed at reducing housing inventory, would require substantially more funding than what is currently available. However, many inland local governments are financially strained after three years of a zero-Covid policy and amid a prolonged downturn in the property market. This necessitates a larger funding scheme from the central government, surpassing the existing RMB300 billion re-lending quota.

Additionally, stricter fiscal discipline and financial regulations may diminish the incentives of some officials to pursue more aggressive policy measures. Therefore, upcoming policy events, such as the July Politburo meeting, the Third Plenum, and ad hoc meetings or announcements by major authorities (e.g., the State Council, NDRC, MOF, MOHURD, PBOC, SASAC), will require close monitoring, particularly regarding solutions to address funding and implementation challenges.

6. Other potential funding sources. In addition to the RMB300 billion lending quota, possible funding sources for housing destocking include commercial bank loans, policy bank bonds, local government special bonds (LGSB), and pledged supplemental lending (PSL) from the PBOC:

• PSL is designated to fund property-related stimulus packages, including the large-scale shantytown renovation during 2015-18, and the “Three Major Projects” for the property sector most recently. Goldman assumes PSL net issuance will rise to RMB700bn in 2024 from RMB99bn in 2023, although there are some uncertainties if policymakers prefer to use more re-lending (funding costs at 1.75% pa) relative to PSL (2.25%) to fund housing destocking.

• LGSB was a funding source for shantytown renovation and land reserves in 2018-19, although there was a temporary ban on LGSB proceeds spending in these areas in late 2019 and early 2020. Local governments have only used ~RMB900bn out of the RMB3.9tn full-year LGSB issuance quota so far this year (as of late May), much slower than in previous years. This implies an RMB3tn quota available for the remainder of this year, part of which could be used for supporting the ongoing housing easing package. In early 2024, policymakers allowed LGSB proceeds to be used as equity capital to fund public housing-related projects, which suggests a likely larger multiplier effect if implemented well.
• Policy banks were major players in the 2015-18 PSL-backed shantytown renovation, and in theory, they have no explicit constraint for external financing. Hence, more policy bank bond issuance and related lending could be possible.
• Commercial banks, especially the large ones, may also provide more funding support if needed. Moreover, the PBOC can increase the re-lending quota for housing destocking if needed.

On the other hand, the current issue of ultra-long-term central government special bonds (ULT CGSB; 超长期特刑国债) may not be a financing instrument tailored for the real estate industry. These bonds are intended to finance major projects in strategically significant sectors (such as high-tech manufacturing). However, buying housing inventory well below market value and forcing banks to lend more to projects started by certain problematic POEs may put a greater strain on banks, necessitating further government support for the banking system.

At the same time, GreatGameIndia reported that last year, China embarked on the construction of 15 new cities in Iraq, with East China Engineering Science and Technology Co., Ltd. and another company securing contracts to build the housing units.