Finally, China is trying to fix the current crisis ( News New York )

More than a year after one of China’s biggest real estate developers began the collapse, trouble is unfolding in cities across the country. Dozens of other developers also missed debt payments, sales of new homes plunged and construction cranes stalled in many areas.

This week, the Chinese government, which until now has largely been dwelling on the country’s housing crisis, took its most drastic steps yet to test the damage caused by the turmoil involving China’s Evergrande Group, the world’s worst. developer, and many of his competitors.

Real estate development plays an important role in China’s economy, representing about a quarter of its economic output and a quarter of its bank credit. Housing accounts for at least three-fifths of household income in China, and many Chinese view apartments as the only sure way to build wealth.

This week’s intervention by the government has taken on greater urgency as Covid-19 cases hit record levels. The infections have sparked a new wave of strict lockdowns, which are disrupting factories and other businesses, cutting into consumer spending, and preventing home buyers from visiting apartment complexes for shows. This economy is already under more severe pressure.

China’s treasury recently called on Wednesday’s banks, most of which are publicly traded, to lend more money to complete unfinished apartments, following a similar order put out by regulators hours earlier. China’s central bank, the People’s Bank of China, and the central bank regulator put together 16 measures on the same day to ensure developers can borrow enough money from banks and bond investors, and defer payments when necessary. On Friday evening, the central bank was reduced by $70 billion of funds, which the country’s commercial banks are required to hold together, freeing them for borrowed money.

An affiliate of the central bank earlier this month agreed to guarantee the payment of new bonds from some of the less troubled real estate developers, in an effort to ensure investors were safe to lend to companies.

Financial services are provided to those who purchase a new home within the previous year of sale.

Acting on orders from the Treasury and banking regulators, China’s biggest banks gave credit lines this week to big developers. The Industrial and Commercial Bank of China announced on Thursday that it had issued lines of credit totaling $91 billion to 12 developers. Bank of Communications gave two billion $ 14 billion credit to Vanke, China’s largest developer.

Yi Gang, the governor of the central bank, declared that the government intended to use its policy instruments to stabilize the country’s huge real estate sector.

“China’s housing sector is closely linked to upstream and downstream industries, whose healthy development is important to the overall economy,” Mr. Yi said in a speech on Monday.

Financial regulators in China are under pressure to restore public confidence in the real estate sector. Domestic and international investors are selling bonds and other assets and moving money out of the country as concerns persist about an economy that is expected to grow barely half of Beijing’s target of 5.5 percent this year. Speculation is rising that Xi Jinping, the leader of China, will increase taxes on the wealthy to pay for more social costs.

Bond prices have fallen in Shanghai trading this autumn, succumbing to pressures and making it more expensive for developers to borrow without government support. Lightly regulated wealth management funds, many of which use borrowed money to invest in large bets on the bond market, have seen large cash withdrawals, another sign of broad financial pressures also affecting housing.

Just as China’s health policy is stuck in an inflexible “no Covid” state of lockdowns and mass testing, China’s housing policy is also deadlocked. The firm positions taken by Mr. Xi involved the resolution of the housing crisis and the Covid policy.

With exports now falling and weak consumer spending amid widespread Covid lockdowns, the economy is even more dependent on housing.

“To save the market is to save the economy,” said Han Xiuyun, an associate professor of economics at Tsinghua University, in an online analysis.

In housing, the question is whether the government should once again tolerate people using housing for money, rather than simply as a place to live. Lord XI in 2016 had declared that “housing should be protection, not speculation”, which was the idea of ​​the government two years earlier. The country’s housing ministry imposed a policy of “three red lines” that put guards around how much developers could borrow.

The goal was to prevent developers from borrowing too much and plowing money into speculative projects, while the banks were also borrowing too much. Crossing even one red line pressures the developers to start paying the debt, and their funds quickly filtered out.

The Ministry of Housing has left three red lines in place in its plan as at least three dozen real estate developers wanted one or more rental bonds, mostly overseas bonds.

China’s housing market was already inflated and may have collapsed even without tougher policy, some analysts believe, after house prices soared for the past quarter century.

Oxford economists calculated this week that the prices of newly built homes across China have reached 8.5 times the average household income of last year. In the United States, that ratio was 5.8 times higher in 2007, before the American housing bubble burst.

Some economists say Mr. Xi’s speculation was correct, but the response plan was more carefully crafted.

“Although the regulation of “housing is not speculation” is correct, the implementation of the plan may require the end in light of market conditions,” Zhu Ning, vice dean of the Shanghai Advanced Institute of Economics; he said.

This week’s flurry of regulatory action could mark the start of that fine tuning.

An affiliate of the central bank has begun issuing guarantees for $35 billion worth of bonds issued by the country’s real estate developers. The government’s protection will allow developers to sell new bonds to the state-controlled banks.

The proceeds of the new bonds will then be used to pay off or redeem existing bonds. The goal is to alleviate the burden of cost-effectiveness against developers.

Under another set of measures released this week, China’s Banking and Insurance Regulatory Commission separately said it may delay collecting interest and principal payments from real estate developers for a year. The deferral allows China’s commercial banking system to note large waves of troubled loans that would otherwise depress profits.

The housing ministry has started allowing local governments to set broad limits on who can buy apartments. Many cities have been disenfranchised from buying houses until now, to make housing less expensive for long-term residents.

Finally, China’s Ministry of Finance has approved a temporary tax break to ensure that investors keep their money in the property market. It is the same law that 20 percent of the income tax from the sale of real estate can be avoided if the sale is invested in another fund of comparison within 12 months.

The tax break, which is similar to the so-called Section 1031 tax provision for real estate investors in the United States, expires at the end of next year. The goal is for people sitting on large gains in the value of their homes to trade up to newer and larger apartments. That could help revive at least part of China’s massive construction industry.

The longer-term problem is that the vast movement of the rural population to the cities that began in the 1980s has slowed down, as the villages have been depleted of people, while the country’s birth rate has plunged. Oxford economists estimated this week that demand for housing would have been 8 million units per year from 2010 to 2019, but will fall to just 4.6 million units per year by 2030.

Beijing’s dilemma lies in how to manage the decline of the construction industry and many associated industries, from steel and cement to furniture and washing machines.

The construction sector “needs to pull back,” said George Magnus, a fellow at the China Center at the University of Oxford. “It is asked how, and how much.”

Li you contributed to the investigation.


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