China property crisis spoils Communist party’s moment of triumph

As China’s Communist party congress meets this weekend to celebrate its achievements over the past five years, economists will be watching for how Beijing plans to confront its most momentous economic challenge.

A crisis in China’s real estate sector has been gaining momentum since Evergrande, one of the country’s largest property developers and the world’s most indebted, failed to make bond payments last year.

The shock wiped out billions of dollars lent to the company and its peers, crippling construction and leaving swaths of unfinished housing across the country, and prompting mortgage boycotts from angry homebuyers.

Chinese policymakers, who have also been grappling with the fallout from President Xi Jinping’s strict zero-tolerance approach to coronavirus, are now contending with the weakness in a sector that contributes more than a quarter of economic output but is riddled with excessive borrowing. In August, house prices fell 1.3 per cent year on year — their fastest pace of decline in seven years.

“So far, the policy easing has been playing catch-up,” said Larry Hu, chief China economist at Macquarie. “It’s still behind the curve in the sense that the property sector is still in deep trouble”.

He pointed to a Rmb200bn ($28bn) special loan quota from the central bank to local lenders unveiled in August and the prospect of a further reduction in mortgage rates, which were rising before the crisis erupted. “I do think that it’s likely that after the Communist party congress, they will do more to support the property sector,” Hu added.

Beijing’s response has reflected a cautious approach, given the risk of increasing the property sector’s immense debts. It has made incremental reductions to the five-year loan prime rate that underpins mortgage lending, most recently in August from 4.45 to 4.3 per cent. This month, it relaxed the minimum mortgage rate in certain cities and introduced refunds of capital gains tax for some home purchases.

Analysts at research outlet CreditSights said that these policies, while underlining the government’s “urgency in stabilising sentiment”, were unlikely to “significantly improve the liquidity crunch faced by privately owned property developers”.

“We do not expect a visible recovery of the housing sector in the medium-term,” the analysts noted.

Meanwhile, the CCP congress could reveal high-level plans to address some of the issues driving the property crisis. Xiangrong Yu, chief China economist at Citi, said that the government’s efforts had “somewhat underdelivered this year”. But he suggested that a new economic team, which is expected to be introduced at the meeting, could lead to better co-ordination between central and local governments.

The latter rely heavily on land sales to developers for income, and have an interest in the boost that construction provides to the local economy, but now face a fiscal crisis of their own as activity dries up.

In China, houses are typically sold before they are built. The proceeds, which are placed in escrow accounts, are used immediately to finance construction. The lack of checks on this approach, Yu added, was partly to blame for the weakness in the market.

“A widely expected nationwide regulatory framework is still non-existent because local government’s interest in local stability could be misaligned with Beijing’s goal for the whole market’s stability,” he said.

Nancy Qian, a professor of economics at Northwestern University, said the presales practice amounted to “essentially borrowing from the consumers”.

“The consumers were happy with this because they got a house,” she added. “This [system] works really really well until you stop growing.”

On top of anaemic growth expectations, policymakers must confront a sharp fall in the value of the renminbi, which last month hit its lowest level in more than a decade.

The drop was part of a global currency weakening against the dollar in light of the US Federal Reserve’s aggressive interest rate rises to tame inflation. But it could serve to further tie Beijing’s hands in its response to the property weakness.

“If US yields continue to climb, then we could be in a situation where this one-sided depreciation expectation materialises again, and in that case, they will not be able to do any easing because it exacerbates [the depreciation],” said Carlos Casanova, senior economist for Asia at Swiss bank UBP.

Beyond the currency, decisions announced at the congress or thereafter are likely to be constrained by the government’s cautious approach to debt. Casanova said that stimulus efforts had been “incremental at most” because of a desire not to “overstimulate the economy”.

Attempts to reduce debt at real estate developers from the middle of 2020 onwards coincided with the emergence of the property crisis and sparked fears over the companies’ inability to access funding. For now, the question is whether Chinese policymakers will signal that they are sticking to that principle for the next five years.

Over the past five years, deleveraging has “probably been the most important thing”, Hu said.

“It’s hard to imagine a significant stimulus without leveraging up the economy”.