China property fix aims to restock speculation

Restocking risk. A little bit of speculation in the property market may be just what China needs. The phrase “reducing housing inventory” has appeared in Beijing’s latest policy directive, and President Xi Jinping's ideological blurb “houses are for living in, not for speculation” is no longer present. It's a throwback to a sentiment that preceded the most recent real estate boom.

If 2015 is any guide, the policy shift signalled last week by the top decision-making body of the Chinese Communist Party paves way for local governments to absorb developers’ unsold stock into social housing. Clearing housing inventory was a policy priority a decade ago after regulators tried to curb leverage in the financial system. That crackdown led to a slump in home prices and a slew of defaults.

Local governments then embarked on ambitious programmes to redevelop shanty towns. They provided cash compensation directly to residents affected by urban renewal projects to buy new apartments – by drawing loans from the central bank’s pledged supplementary lending programme. Outstanding PSL ballooned five times to 3.25 trillion yuan ($450 billion) between May 2015 and the end of 2018, according to the People’s Bank of China. A bull market ensued.

Ironically, the de-stocking enabled developers including China Evergrande and Country Garden to leverage up again and expand rapidly. By the end of August 2023, the combined floor area of unsold homes stood at 648 million square metres. Based on the average home size of 90 square metres, that would be equal to 7.2 million homes, per Reuters.

Beijing looks prepared to tap into this trove of trapped wealth. Indebted local governments are trying to turn some of the unsold inventory in their cities into social housing projects. Again, this requires strong financial support from the central bank and state lenders.

However, if Xi is to realise his vision of a "new development model" for the sector, another source of demand for inventory will come from the private sector. China's leader wants a two-tiered market where local governments take responsibility for providing affordable housing, and upgraders and investors operate in a smaller private residential market.

In Beijing and Chongqing, authorities are removing homebuying curbs, sending the signal that property remains a viable way to create and store wealth. It puts speculation back on the table too.

($1 = 7.2162 Chinese yuan renminbi)