Wang He: Government Policies Ineffective, China’s Real Estate Market Beyond Rescue

The unfinished 117 Tower in Tianjin has been mocked for setting a Guinness World Record as the tallest abandoned building. (Video screenshot)

October 19, 2024 – On October 17, China’s Ministry of Housing and Urban-Rural Development, the central bank, and three other departments held a press conference to introduce measures for implementing the Chinese Communist Party (CCP) Politburo’s directive to “halt the decline and stabilize” the real estate market, promoting its stable and healthy development. They announced two policies: (1) adding 1 million units for urban village and dilapidated housing renovations through monetary compensation and other methods, and (2) increasing the credit scale for “whitelist” projects to 4 trillion yuan by the end of the year (as of October 16, approved loans for real estate projects on the whitelist had reached 2.23 trillion yuan). This means an additional 1.77 trillion yuan in real estate development loans will be issued in the last two months of 2024.

The authorities seemed confident that they had released two major policy “bombs.” However, the market did not respond favorably. On the same day, Chinese A-shares closed lower, with the Shanghai Composite Index falling below 3,200 points, and real estate stocks plummeted. Hong Kong stocks briefly fell below the 20,000-point mark, with trading volume less than 200 billion Hong Kong dollars (on October 18, A-shares rebounded for other reasons).

The authorities were dealt a harsh blow, once again highlighting that their judgment of the real estate market and their response strategies are wrong.

The current predicament in China’s real estate sector is primarily due to structural problems that will take years to resolve through market adjustments. Short-term stimulus policies won’t help, and the authorities’ forced counter-regulation (failing to allow the bubble to deflate properly) will only worsen the situation.

The prominent manifestation of China’s structural real estate problems is the housing bubble and inflated property prices.

(1) According to a report by the popular economist Ren Zeping, in 2020, the total value of China’s housing market was $62.6 trillion, significantly higher than the $33.6 trillion in the U.S., $10.8 trillion in Japan, and $31.5 trillion combined in the U.K., France, and Germany. In terms of the ratio of housing market value to GDP, China’s ratio was 414% in 2020, higher than the U.S. (148%), Japan (233%), Germany (271%), the U.K. (339%), and France (354%). For comparison, the highest ratio of housing value to GDP in the U.S. around the 2008 financial crisis was 169%, and in Japan, before the 1990s real estate bubble burst, it reached 391%.

(2) According to research by the Shanghai E-House Real Estate Research Institute, in 2020, the average price-to-income ratio in 50 Chinese cities was 13.4. In first-tier cities, the ratio was 26.6, while in strong second-tier cities, weak second-tier cities, and third- and fourth-tier cities, the ratio was around 12. In contrast, the price-to-income ratio for the U.S. before the 2008 financial crisis was 6.4 (in 2021, it was 7.4). While U.S. housing is already considered expensive, China’s prices are about twice as high.

In other words, the real estate market has long held China’s economy hostage. The current crisis is the inevitable consequence of economic laws. The authorities, drunk on the power of control, believed they could act arbitrarily, only to fall into a pit of their own making.

Initially, the authorities were indifferent, but now they are finally worried. In reality, China’s real estate crisis has persisted for three years, and the situation is only getting worse.

The official data paints a grim picture: From January to September of this year, real estate development investment fell by 10.1%, the nationwide sales area of newly built commercial housing reached 702.84 million square meters, down by 17.1% year-on-year, and the sales value of newly built commercial housing was 6.888 trillion yuan, a decline of 22.7%.

Even worse, from January to September, the completed housing area was 368.16 million square meters, down by 24.4%, including 268.71 million square meters of completed residential housing, which dropped by 23.9%. Compared with the data from January to August, the situation has worsened (from January to August, the completed housing area was 333.94 million square meters, down by 23.6%, with the residential housing area falling by 23.2%).

The sharp decline in the completed housing area signals the collapse of the CCP’s "guaranteed delivery of homes" policy.

In July 2022, a wave of mortgage boycotts by buyers of "unfinished" buildings began, causing great concern among the authorities. The Politburo convened to emphasize the need to "guarantee home delivery," and by the end of the year, they introduced the "16 Financial Measures" to "support the stable and healthy development of the real estate market."

However, commercial banks are businesses and must account for economic realities. No one wants to take on bad loans, so these policies have largely been ineffective and have failed to be implemented. For example, Country Garden, a leading private real estate developer, had access to several hundred billion yuan in bank credit but still couldn’t secure loans, leading to its debt crisis.

As a result, the problem of "unfinished buildings" remains unresolved. (Due to China’s pre-sale system, its real estate market operates more like a futures market rather than a spot market. But China’s pre-sale system is extremely distorted, leading to the illegal misappropriation of funds from buyers and the globally rare phenomenon of "unfinished buildings.")

According to Lu Ting, Chief Economist for China at Nomura Securities, the real problem in the current real estate market may not be that too many homes were built, but that too many were sold before completion. Using Country Garden as an example, Lu notes that while the company has around 36,000 unsold but completed homes, it has sold 730,000 homes that are not yet finished. Additionally, it has about 350,000 homes still under construction that remain unsold. The ratio between these three categories is roughly 1:20:10.

In other words, unless the "unfinished buildings" issue is resolved, China’s real estate market is destined to collapse.

The authorities are fully aware of this. Under pressure, on January 12 of this year, the Ministry of Housing and Urban-Rural Development and the National Financial Regulatory Administration jointly introduced the real estate "whitelist," urging cities at or above the prefecture level to establish real estate financing coordination mechanisms to address the difficulties and challenges in real estate financing.

However, the "whitelist" has also struggled to be implemented. The evidence lies in the previously mentioned data: from January to September, the completed housing area fell by 24.4%, reaching only 368.16 million square meters.

The authorities are likely to argue that they’ve made great efforts and progress (see chart below).

Data Source: Reposted from the "21st Century Business Herald" website

If, as the official data claims, 2.23 trillion yuan in loans had already been granted by October 18, why did the completed housing area fall by 24.4%? The problem lies in the fact that the approved loan amounts don’t necessarily translate into actual funds reaching companies. Commercial banks, under political pressure, may approve loans but carefully control the actual distribution of funds under the pretext of "economic rationality," leaving higher authorities without grounds for criticism. (For more details, see the extended reading: "The CCP Introduces Two Measures to Save Real Estate, Property Stocks Plummet – Expert Analysis")

This explains why, at the recent press conference, Xiao Yuanqi, Deputy Director of the National Financial Regulatory Administration, announced that all loans for commercial housing projects would be managed under the "whitelist," ensuring that qualifying projects "are included as much as possible" and that approved loans are "disbursed as soon as possible."

But commercial banks are no fools. What defines a "qualified project"? What does "approve all necessary loans" mean? And what does it mean for funds to be disbursed "as soon as possible"? Ultimately, these decisions are still at the discretion of the banks.

Therefore, as discussed in this article, beyond the structural adjustments that will take years to address, the other reason why China’s real estate market cannot be saved is the misdirection of the authorities, the ineffectiveness of their policies, and the fact that every party involved is merely passing the buck and deceiving their superiors.

First published by Dajiyuan