Beijing’s Mishandling of China’s Property Crisis
Introduction:
China’s property crisis has presented a significant challenge for Beijing, compounded by structural problems that make it nearly impossible to solve in the short run. Beijing’s initial failure to acknowledge and address the crisis allowed it to spread throughout the country’s economy and finance sector. While the government’s recent efforts to tackle the issue are commendable, they fall short of the scale required to combat the crisis effectively.
Beijing’s Slow Response:
For two years, Beijing disregarded the severity of the property crisis, refusing to assist the struggling property developer Evergrande and its customers or protect Chinese financial markets from the repercussions. This lack of action allowed other developers to fail, exacerbating the crisis. It was only last year that Beijing finally recognized the gravity of the situation and began taking cautious steps towards a solution.
Inadequacy of Beijing’s Measures:
Beijing’s latest remedy involves issuing 1 trillion yuan in ultra-long-term debt, with 500 billion yuan allocated for purchasing vacant housing and converting it into affordable housing. While this plan aims to restore confidence in real estate investing and provide financial resources to distressed developers, it ultimately falls short. The allocated funds are insufficient compared to the scale of the crisis, especially when considering Evergrande’s initial $300 billion failure. Experts suggest that multiple trillions of yuan in public financing will be needed for an effective remedy.
Mismatched Distribution of Housing Units:
Another significant challenge lies in the distribution of surplus housing units. When Beijing purchases units to convert them into affordable housing, they may be located in cities and regions with no shortage of affordable housing. The most intense demand for affordable housing exists in first- and second-tier cities, while vacant units are predominantly found in smaller cities. Consequently, purchased units may remain unoccupied, while housing in larger cities remains unaffordable for many working Chinese.
Low Rental Yields and Lack of Incentives:
The affordability issue is particularly severe in first- and second-tier cities, where housing shortages have driven up prices. As a result, rental yields have plummeted to a mere 1.64 percent, which is even lower than the financing rate for resale units. This discourages participation in Beijing’s program since there is little incentive for investors. The People’s Bank of China (PBOC) pilot program, which targeted 100 billion yuan, has only utilized 2 billion yuan thus far, highlighting the lack of interest.
Reluctance of Banks and Local Governments:
Banks are also hesitant to get involved in Beijing’s program due to the rise in non-performing loans they have already experienced. Moreover, local governments across China are reluctant to participate due to heavy debt burdens caused by previous infrastructure projects. The burden is so significant that some local governments struggle to provide basic services to their populations. Consequently, the central government had to provide initial financing for the program. However, local authorities have little desire to take on additional debt.
Long Road Ahead:
To free China’s economy from the weight of the property crisis, Chinese authorities will need to do more. However, even the most effective remedies will take longer than desired to resolve this dire situation completely. The memory of this crisis will linger in Beijing longer than anticipated.
Conclusion:
Beijing’s mishandling of China’s property crisis has hindered effective solutions and exacerbated the problem. While recent efforts to address the crisis are a step in the right direction, they fall short of the scale required for success. The mismatched distribution of housing units, low rental yields, lack of incentives, reluctance of banks, and local government debt burdens present significant challenges. It is clear that resolving this crisis will require more extensive measures and a longer timeframe than Beijing desires.
