China announced real estate relief plan to soothe year-long crisis

Lorenzo Bagnato

22 May 2024 - 21:03

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After years of hurdles for China’s massive real estate market, the central government finally decided to act.

China announced real estate relief plan to soothe year-long crisis

The Chinese government is finally addressing the three-year-long real estate crisis in the country, which brought its largest property developers to their knees. China is the world’s second-largest economy, and its economy depends largely on its real estate market. According to UBS, real estate will amount to almost 25% of China’s GDP in 2024.

The People’s Bank of China announced a relief plan for 300 billion yuan (41 billion USD) to purchase unsold properties in the country. Beijing’s effort will be directed to reduce the supply overcapacity that made China’s property developers fail.

The money will be redistributed to local banks and the newly purchased properties will be turned into social or affordable housing.

Analysts reacted positively to the news, saying it was a step in the right direction. However, it may be far from enough.

According to Goldman Sachs, the value of unsold properties in China exceeds 30 trillion yuan. The bank’s chief of China Hui Shan said that “the size and scale of the problem is a lot bigger than at least what we can see [of] the central government committed funding”.

However, Shan added, this may be the beginning of a new approach. “If they realize prices continue to fall and sales are not picking up,” she said, “I imagine the central government will have to step up the funding they are providing.”

A lengthy crisis

China’s property hurdles began in 2021 when Evergrande, the then-biggest real estate company in the country, declared a default. For years, Evergrande tried to repay its obligations by selling the remaining assets in its portfolio. However, after failing to attract willing investors, Evergrande declared bankruptcy and its assets liquidated.

China’s central government could have bailed out Evergrande. In most Western economies, a company as big and as important as Evergrande would have received immediate government support.

Beijing, however, despised Evergrande’s speculative moves, which turned the real estate market into a bubble and made a crisis inevitable. For this reason, China’s officials said property developers who engaged in price speculation and could not handle the consequences should go bankrupt.

After Evergrande, other giant developers including Country Garden and Shimao faced a similar fate.

Estimates say China currently hosts more apartments than total households. Supply is enormous, with entire cities made of “ghost” skyscrapers. Prices are at their lowest levels in decades, and Chinese consumers don’t want to purchase new homes anymore.

The real estate crisis could hamper China’s growth. Beijing needs to act, and the new buy-back plan is indeed a step in the right direction. It allows the government to control the crisis while leaving property developers to their fate, which is exactly what the Chinese government always sought.

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