Row of upscale villas remain unsold and unoccupied. (Photo by Forrest Anderson/Getty Images)
From the start, Beijing has failed to meet the needs of the economy’s property problems. When the crisis broke in 2021 with the announcement that the giant property developer Evergrande could not meet its financial obligations, Beijing acted as if it was no big deal. The authorities simply refused to do anything, either the help Evergrande and its customers or protect Chinese financial markets from the fallout. This inaction allowed the problem to metastasize throughout Chinese economics and finance. Meanwhile matters got worse as other developers also failed. When last year Beijing finally awakened to the fact that it had a big problem in its hands, its planners moved in baby steps. Even now, when the government appears to have launched a big response, its measures will fall short of the economy’s needs.
Beijing’s latest effort involves the issue of 1.0 trillion (about $140 billion) in ultra-long-term debt to put some 500 billion yuan into the purchase of vacant housing and repurpose it for affordable housing. This so-called repurchase plan aims to restore Chinese confidence in real estate investing. Beijing notes three means to this end: First, the program will put all China on notice that the government will act as a buyer of last resort. Second, the flow of funds will indirectly put financial resources at the disposal of distressed property developers. Finally, the use already existing properties will make for a less expensive way to offer the public housing alternatives than building from scratch.
Especially compared to Beijing’s earlier do-nothing approach, this effort is welcome. But as massive as it looks, it is too little for the needs of the moment much less the ambitious aims of the program. Consider that the entire trillion-yuan program pales next to Evergrande’s initial failure of about the equivalent of $300 billion. And this comparison does not even consider the failures that have taken place since, including the also immense Country Garden. Against this background, it should be evident that an effective remedy will require multiple trillion in public financing.
Making matters still more complicated, the surplus housing units Beijing plans to buy are not where affordable housing needs are. The affordable housing issue is clearly most intense in first and second tier cities, but the bulk of vacant units lie in smaller cities. The purchased units, however refurbished, may as a consequence continue to lie vacant while in larger cities, much housing will remain unaffordable to working Chinese. Not even the Chinese Communist Party can move apartments from one city to another.
Indicative of this problem are the of low levels of rental yields. In first- and second-tier cities, where the affordability question is most intense, the housing shortage has pushed up prices so much that rental returns, according to the property agency Centaline, fell by May of this year to barely 1.64%. This is lower than the 1.75% rate charged on financing the resale units. With returns from the investment lower than financing costs, few if any have any incentive to participate in the government’s program. This problem was already evident earlier last year in a pilot program of this kind run by the People’s Bank of China (PBOC). Of the initial 100 billion yuan the bank’s program targeted, barely 2 billion has been used to this day. Sapping the potential of Beijing’s larger program still more is banks’ reluctance to get involved, not the least because they have already seen a sharp rise in their non-performing loans.
If all this were not enough to present Beijing’s new program with a serious uphill battle, local governments in China have also shown hesitancies. Because Beijing over the years has forced local governments to finance a series of infrastructure projects, not all of which have paid off as handsomely as those promoting them had hoped, local governments across China face heavy debt overhangs. Some face such extreme burdens that they have had difficulty providing their local populations with basic services. This local debt problem, no doubt, is why the program’s initial financing has come through the credit of the central government. Even with that form of relief, it is easy to see why local authorities have little desire to get involved in any program that involves more debt.
The upshot is that Beijing will not only have to do more to free China’s economy from the drag of the property crisis, but that even the best remedies will take a lot longer than anyone in Beijing wants to make this terrible crisis a memory.