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China announces relief in the real estate sector
May 17, 2024, 3:17 p.m
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Abandoned construction sites dot Chinese landscapes due to heavily indebted construction companies. In order to tackle the real estate crisis and stimulate economic growth, the government is announcing significant relief. The measures are causing new euphoria on the stock market.
The Chinese government has announced significant measures to relieve the heavily indebted real estate sector in order to stimulate economic growth in the largest people’s republic. This includes the offer that municipalities can buy unsold or unfinished properties, as Vice Prime Minister He Lifeng announced at a meeting with representatives of authorities, banks and real estate companies, according to state media. In order to stimulate private investment in real estate, the required minimum equity capital will also be reduced.
The real estate sector accounts for more than a quarter of China’s economic output. However, the construction boom of the past decades was mainly achieved through loans, which they invested in new projects together with their income. But the government under state and party leader Xi Jinping decided to counteract real estate speculation on the hot market and ensured that companies could no longer easily get fresh money.
As a result, demand fell, housing values plummeted and corporations became indebted. This ultimately led to large companies such as Evergrande and Country Garden being unable to finish building some of the apartments that had already been sold. Unfinished houses and construction sites now line entire districts. Buyers who usually pay in advance for their apartment or house in China are often the ones who suffer.
The government is giving in
“Great efforts” are now needed to promote paid for but unfinished housing projects, said Vice Prime Minister He, according to the state news agency Xinhua. “In cities where there is a lot of housing, the authorities can make bids and buy some of these apartments at reasonable prices to use them as affordable housing.”
Local governments should “properly manage the vacant residential properties transferred in this way,” He said. The aim is to “help housing associations that are in financial difficulties to solve their problems”. Further details on the scope and structure of this buyback program were not initially known.
Citing the central bank and the national financial regulator, Xinhua also reported that the minimum capital requirements for mortgage loans for individuals will be lowered to 15 percent for the purchase of a first property and to 25 percent for the purchase of a second property. “This is the lowest down payment requirement and mortgage interest rate in history,” said Yan Yuejin, research director at Yiju Research Institute.
“These measures send very positive signals and will be very helpful in improving market sentiment,” Yan continued. “We are very optimistic about the potential impact on the real estate market.”
Stock market flight as the first reaction
Shortly after the new measures were announced, the share prices of real estate companies in Hong Kong recorded a sharp increase. The Agile Group increased by 23 percent, Fantasia by 8.3 percent, the Sino-Ocean Group and CIFI-Holdings each by more than twelve percent. In anticipation of political announcements, prices had already been on the rise in the previous days.
The Chinese government has been trying for months to stimulate economic growth with targeted measures. In particular, the dissolution lawsuits against the Evergrande and Country Garden corporations, each of which are almost 200 and 300 billion US dollars in debt, threaten serious upheavals and there are fears that this will spread to other sectors of the economy. The announced measures appear to be the most significant to date.
“China’s plan to stabilize the real estate market is underway,” said economists at major bank HSBC. “The faster and bolder the intervention plan, the more effective we believe it will be.”