How desperate do you think the Chinese government and the Communist Party are to staunch the escalating losses in the country’s biggest black hole—housing and property?
Friday saw another attempt to fix the problems by President Xi Jinping and his government. But you’d have to say more work is needed on top of Friday’s announcement of cuts to loan-to-valuation ratios, interest rates for first and second home purchases, and allowing local governments to buy up completed or almost finished apartments and houses and use them for social housing.
Today there’s the chance to send a more powerful message with the People’s Bank of China setting the one- and five-year prime loan rates. No change is expected (the five-year rate was cut earlier this year by a record 0.25%). The one-year medium loan facility rate was left steady last week at a record low of 2.5%—that’s had no impact on property.
And yet, if the government were really serious, it would be chopping those rates to drive home the point that it is determined to fix the black hole that is property.
So far, the past year or so has seen interest rates cut to historical lows, more money for lending has been made available by reducing bank reserve asset ratios and indirectly supporting mortgages and other measures, and yet the housing slump has continued to deepen—especially in the first four months of this year.
That has sent companies large and small crunching household spending and confidence.
And more help is needed because hours before China announced the new measures on Friday to help steady the ailing property industry, government data showed new housing prices have slumped nearly 10% since the start of the year and that investment in property had dropped nearly 10% as well in the past year, showing no sign of slowing.
But housing starts fell almost 25% in the year to April, and sales as measured by floor area were down 20%. Financing for property projects fell 25%.
China’s central bank said it would reduce the minimum down payment for mortgages and remove the floor on interest rates for first and second homes. Minimum down payments for loans for first homes will be 15% of the purchasing price. For second homes, it will be 25%, it said.
The announcement by the People’s Bank of China said that effective Saturday, the interest rate for first-time housing provident fund loans for under 5 years will be cut by 0.25 percentage points to 2.35%. The rate for loans over 5 years was reduced by 0.25 percentage points to 2.85%.
All are historic lows—like the market rates overseen by the People's Bank of China.
These historic lows tell us more about the failure, so far, of attempts to staunch the red ink in property and stop it from spreading elsewhere in the economy.
Retail sales rose only 2.3% in April—the slowest growth for 15 months. That’s despite lots of talk from the government about how well the economy is doing.
The fact that rate cuts and reserve releases have failed to halt the slide in property should be a warning that the latest policy moves need more money to back them up.
The proposed purchase of empty apartment blocks for social housing is a direct subsidy to the property developers, their banks, and governments who could be on the hook in a huge collapse or the enforcement of the Hong Kong court-ordered liquidation of Evergrande and its $US330 billion in onshore and offshore debt.
That’s a good idea because it will inject cash directly into the process (if it is not creamed off by local governments and banks, though, who are owed huge amounts from the property developers).
Chinese and Western media reported quoted He Lifeng, a vice premier, as saying on Friday that officials would roll out policies to suit each city and “fight the tough battle of dealing with the risk of unfinished commercial housing.”
As part of the latest policy relief, the central bank said it is setting up a 300 billion yuan ($US42 billion) fund to finance purchases of unoccupied housing by state-run companies and local governments for use as affordable housing.
That fund was mentioned earlier this year as part of an earlier assistance package—the fact that it is still not operating tells us just how weak the government’s response to the crisis remains, with a worrying lack of urgency.
Earlier Friday, officials of the National Bureau of Statistics acknowledged that domestic demand—spending by consumers and businesses—remained “insufficient” and said the government was considering further ways to revitalize the property industry after housing prices sank 9.8% in January-April from a year earlier.
“The complexity, severity, and uncertainty of the current external environment are significantly increasing. There is insufficient effective domestic demand, high business pressure, and many risks and hidden dangers,” said Liu Aihua, a spokesperson for the bureau.
“The foundation for recovery needs to be strengthened,” Liu said. That has been a familiar message at the monthly NBS media conferences after the major data drops.
