My garlic for a home: China struggles to revive property sector

For 8,000 years, people in China have known the value of garlic. Today, while still central to Chinese cuisine and traditional medicine, rarely are the pungent bulbs used in property deals.

But developers in some parts China have in recent weeks promised to accept stocks of garlic — as well as watermelons, wheat and barley — as down payments from farmers on new apartments.

The food-for-property barter deals reflect increasing desperation among real estate developers after a sharp fall in the industry caused by Covid-19, central government policies and an economic slowdown.

Both provincial officials and real estate developers had been relying on a wave of 100mn urban migrants over the next decade.

The fallout from sweeping lockdowns has worsened an already-bleak outlook for the property market, especially in the smaller cities closer to poor rural areas.

“It’s the third year of Covid and many people are worn out, unemployed or underemployed, and have drained their savings to a level at which they now have to reduce their spending,” said Ting Lu, chief China economist at Nomura.

Over the past six months, the People’s Bank of China, the central bank, has relaxed lending restrictions and cut mortgage rates while the finance ministry put on ice plans to expand property tax trials.

Officials are also rolling out a system in which households receive vouchers for future home purchases if they agree to have their properties demolished. This is targeted mostly at tier-3 cities of 3mn people or fewer and tier-2 cities of 3mn-15mn.

In some areas, city officials also eased restrictions on second home purchases, crossing one of Beijing’s “red lines” that until recently authorities were careful to obey.

Despite these efforts, many poorer citizens are not convinced to invest. The reluctance is not isolated to garlic growers in Henan province and extends beyond the tier-3 cities into tier-2 cities, which are typically wealthier.

According to a Nomura analysis, Chinese property data show that in recent weeks, a return to growth in new home sales has begun in some larger, wealthier cities. However, new home sales in tier-3 cities declined further, and is down almost 40 per cent from a year ago.

Even in Hefei, the capital of Anhui province in China’s east, real estate agency 5I5J set off protests at offices when it pulled out of the city after months of declining sales, according to Caixin, a domestic business publication.

In the central city of Zhengzhou, the capital of Henan and home to 12mn, one real estate agent told the Financial Times that despite home prices falling to record lows, market activity remained depressed.

In response, some Communist party neighbourhood units have introduced a metric for their “key performance indicators”: how many people they can convince to buy houses, according to local media reports.

Many economists had forecast that after hundreds of millions of people emerged from lockdowns enforced in March, April and May, the pent-up demand, coupled with the state’s stimulus and easing measures, would spark a “V-shape” recovery.

However, Xiaoxi Zhang, an expert on the Chinese financial system with research group Gavekal, said “the recovery trajectory is all but certain to be much weaker than the rapid rebound after the 2020 lockdowns”.

Mortgage lending in the first quarter fell to its slowest pace on record and is “likely to be worse” in the second quarter, while medium- and long-term loans to households were also far below normal levels, Zhang wrote in a recent report.

“The ‘new normal’ of tougher Covid restrictions, and the continuous uncertainty over whether lockdowns will return, have left households less confident in the outlook,” she said.

Nomura’s Lu added that the housing voucher policy “sounds like a perfect plan, but is likely to have a very low success rate” against a backdrop of struggling developers and local governments.

“The housing voucher programme gets no cash support from the central bank. Lacking funding will likely make the programme look like a perpetual motion machine, which can run infinitely without an external energy source but does not exist in the real world,” he said.

“Households may believe there is a high risk of new homes not being completed because of building delays or due to developers’ financial stress.”

Efforts to buoy the market are also being undercut by the policy direction set over the past two years by President Xi Jinping to wipe out debt-fuelled property market speculation.

The market, in the eyes of the country’s leader, not only poses systemic risks to the world’s second-biggest economy but also exacerbates inequality.

In recent months, Xi’s catchphrase “homes are built to be inhabited, not for speculation” has been reiterated by the leadership and state media.

Bucking Xi’s edict, developers in the south-west province of Sichuan last week launched a two-week promotion for local growers to swap watermelons for new apartments. Worried about the potential for losses, they placed a limit of five tonnes of melons per buyer.

Additional reporting by Arjun Neil Alim and Maiqi Ding in Beijing