Despite financing and execution risks, government purchases of unsold properties could have upsides.
Despite financing and execution risks, government purchases of unsold properties could have upsides – but ultimately it will be up to consumers to sustain the turnaround.
In January, the government came up with a policy empowering local authorities to “white-list” certain troubled real estate projects which would then be eligible for bank loans so that they could be completed. But the response from financial institutions has been lukewarm because of concerns that lending to projects in a depressed market could lead to more non-performing loans.
But the biggest macro impact has been on consumption. With around 70 per cent of the wealth of Chinese households held in property, the sector’s downturn has had a negative wealth effect, making people feel poorer and forcing millions of households to cut back on consumption to rebuild their balance sheets.
Another problem is that China’s local governments are cash-strapped. Deprived of revenue from land sales – traditionally their biggest source of funding – and having borrowed heavily to fund infrastructure and other projects, they are saddled with debt that the IMF estimates to be around 110 trillion yuan.
Second, as Mr Robin Xing, Morgan Stanley’s chief China economist, has pointed out, it could ease some of the liquidity pressures facing property developers, many of whose stock prices have risen sharply on the news that local governments will buy unsold homes. With developers’ default risks reduced, consumers may have greater confidence in their ability to deliver partially finished properties, which has been lacking so far.
To reduce the risks of non-delivery of pre-sold, unfinished properties, the IMF has proposed the imposition of stricter escrow rules under which developers can access funds only upon completion of projects – although this would not address developers’ immediate cash-flow problems.
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