China’s Policy Inflection Point Arrives
Andy Rothman says China’s moves to address key challenges in its housing sector mark a significant shift from its stance of downplaying problems and signal that further positive macro measures may be on the way.
Senior Chinese officials have announced significant measures to begin fixing the housing market mess in what I believe is the initial phase of the pragmatic policy course correction we’ve been waiting for.
Vice Premier He Lifeng, joined by top officials at China’s central bank, finance and planning agencies, as well as leaders of major commercial banks, announced on May 17 steps which mark a clear break from the government’s past attitude of downplaying the property market problems and refusing to take action. This is an important change in Xi Jinping’s approach and may signal that changes in other macro policies are also coming.
This is likely the policy inflection point I’ve been expecting for some time. In the May 10 Sinology, I wrote: “There are problems, especially in the property market, and confidence is weak. But, at some point in the near future, I believe Xi Jinping will follow in his predecessors’ footsteps and make the pragmatic course corrections that will revitalize China’s entrepreneurs and consumers.”
The new measures will not, on their own, solve the deep problems in China’s residential property market but I believe they are important first steps, primarily because they reflect a decision by Xi to finally acknowledge the problems—caused largely by his earlier policies—and to publicly take responsibility for fixing them.
With the May 17 announcements, Xi now owns the problems and will be motivated to take additional steps as necessary to put property back on a healthy path. According to official media reports, Vice Premier He acknowledged that “real estate is related to the vital interests of the people and overall economic and social development.” He also said the government will “fully support” efforts to resolve property problems. This is a notable change in tone, rhetoric and attitude from the Party leadership.
The new policies will be difficult and expensive to implement and they do not fix all of China’s property problems. But this is, in my view, a very important attitude and policy inflection point.
The measures Vice Premier He announced address two key issues that have been problematic for China’s housing market. The first is the delays by developers in completing apartments that families have already paid for. He called for efforts to “support the financing and completion and delivery of projects that should be renewed to protect the legitimate rights and interests of homebuyers.”
Secondly, He addressed the steep rise in inventory of unsold homes. To deal with this, He said “local governments can purchase, as appropriate, at a reasonable price, part of the commodity [commercial] housing as security [low-income] housing.” The plan is for China’s central bank to provide about $42 billion to financial institutions which will then lend about $70 billion to local state-owned enterprises (SOEs) which in turn will buy unsold apartments and convert them into affordable housing.
These key policy changes are in response to a 24% year-over-year fall in new home sales (on a square meter basis) during the first four months of this year, which followed YoY sales declines of 8% in 2023 and 34% in 2022 1. The new policies will be difficult and expensive to implement, and mistakes will be made. As I noted, this does not fix all of China’s property problems. But this is, in my view, a very important attitude and policy inflection point.
The central bank also announced further steps to encourage homebuying. The nationwide floor on mortgage interest rates has been eliminated—allowing banks full freedom to compete for business with lower rates—and the minimum cash down payment for primary residences was cut to 15% of the purchase price (down from 20%), the lowest in history, and for second homes it was cut to 25% from 30% 2.
I anticipate more efforts by Xi to put China’s economic policies back on a more pragmatic path, especially to restore confidence among the privately-owned firms that employ almost 90% of the urban workforce and drive the country’s innovation. We may see more on this following a leadership meeting scheduled for July.
Sources: 1 CEIC, Matthews, as of 5.23.24; 2 People’s Bank of China (PBOC), as of 5.17.24.
Andy Rothman
Investment Strategist, China Macro
Matthews Asia