After a years-long campaign to tame property prices, China is upping the ante to break a stubborn cycle of gains that has made homes increasingly unaffordable.
In the past few days, China jacked up mortgage rates in a major city, vowed to accelerate the development of government subsidized rental housing and moved to increase scrutiny on everything from financing of developers and newly listed home prices to title transfers.
Echoing Chinese President Xi Jinping’s (習近平) famous words that “housing is for living in and not for speculation,” Chinese Vice Premier Han Zheng (韓正) said that the sector should not be used as a short-term tool to stimulate the economy.
The intensified focus on real estate — an industry that was already under the scanner — mirrors broader crackdowns on businesses such as education that are seen as widening social inequities.
As China’s economy slows and Xi tries to increase the nation’s birthrate, the policies underscore the Chinese Communist Party’s growing resolve to respond to mounting dissatisfaction with hoarded wealth and narrowing avenues for advancement.
“China’s property sector has been one of the biggest sources of discontent and the government is hell bent on controlling prices so it doesn’t lead to social unrest,” said Beijing-based Liao Ming (廖明), a founding partner of Prospect Avenue Capital. “The measures echo the policy curbs in education in that they are aimed at easing public angst against inequity.”
While China has spent years trying to cool property prices, analysts say that this round of crackdowns will be different.
One clear signal came in Han’s comments on steering away from using real estate to provide short-term boosts for the economy.
“In the past, Beijing has consistently used the property sector to stabilize overall growth,” Nomura analysts led by Lu Ting (陸挺) wrote in a research note, adding that they expect Beijing to change its playbook.
Policymakers will not lift property restrictions this time partly due to concerns about a systemic financial crisis, the analysts wrote.
PENALTIES
Another signal came from the unusually large number of government entities that have vowed to strengthen measures on everything from project development and home sales, to rental and property management services. Eight policy bodies said in a joint statement that they would step up penalties for misconduct. In the line of fire will be developers that default on debt repayments, delay deliveries on pre-sold homes or elicit negative news or market concerns.
Local bureaucrats’ careers are on the line. Officials in cities that lack sufficient regulations and experience rapid price spikes will be held accountable, Chinese Ministry of Housing and Urban-Rural Development official Zhang Qiguang (張其光) said on Thursday last week.
On Monday, commentary from the Xinhua news agency urged governments across the nation to keep home prices at a reasonable level and make it an urgent task.
“New residents and young people can’t afford to buy or rent good homes,” the editorial said. “Those problems are especially acute in cities with population inflow and metropolises.”
Investors have responded by selling property stocks, with the recent stream of news piling pressure on developers that were already being pressed to deleverage and meet China’s “three red lines” on debt metrics.
China Evergrande Group shares closed 0.2 percent lower on Wednesday after plunging more than 40 percent in just under two weeks.
A Bloomberg Intelligence index of 33 major Chinese developers mostly traded in Hong Kong dropped for a fourth consecutive day on Wednesday.
China Chengxin International Credit Rating on Monday revised its outlook for the country’s real-estate sector to “negative” from “stable,” citing concerns about policy tightening and weakened investor confidence.
“Owning property is one of the key ways in which income inequality has worsened in China, so the clamp down will come and will be severe,” said Alicia Garcia Herrero, the Hong Kong-based chief economist for Asia Pacific at Natixis.
MORTGAGE COSTS
The cost of mortgages will increase, particularly for those with multiple homes, as will things like property taxes, she said.
The policies are here to stay, Ren Yi (任意), a social media commentator and Harvard University-educated princeling otherwise known as Chairman Rabbit, wrote in commentary online.
“The nation’s leaders are looking at this issue from a bigger point of view, property isn’t just a economic tool, it sits at the root of all social economic and political issues, and must be dealt with,” Ren said.
The Chinese government needs to maintain a delicate balance. The real-estate sector accounts for 13 percent of the economy from just 5 percent in 1995, according to Marc Rubinstein, a former hedge fund manager who now writes about finance.
Policy missteps could have unintended consequences for the banking system. Chinese banks had more than 50 trillion yuan (US$7.7 trillion) of outstanding loans to the real-estate sector, more than any other industry and accounting for about 28 percent of the nation’s total lending.
Of those loans, about 35.7 trillion yuan were mortgage loans to households and 12.4 trillion yuan were for property development, official data showed.
The major impact for developers is likely to be tighter regulations on the use of revenues from properties that are sold before completion, Siu Fung Lung (龍兆豐), a property analyst at CCB International Holdings Ltd, said in an interview.
While such funds are intended for construction, they are sometimes pooled for working capital, Siu said.
“With bank loans already scrutinized, a tightening of using pre-sale proceeds will make things just more difficult,” he said.
However, all signs point to the government’s determination to ensure social stability, even if it spells near-term turmoil for capital markets. Last month, China Banking and Insurance Regulatory Commission chairman Guo Shuqing (郭樹清) warned against betting that property prices will never fall.
“Property is the single most important source of financial risks and wealth inequality in China,” said Larry Hu (胡偉俊), head of China economics at Macquarie Securities Ltd. It “is worth watching.”
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