China could maintain property restrictions despite slowdown, soften tactics

Chinese leaders, fearful that a housing bubble could undermine the country’s long-term growth, could maintain tough restrictions on the sector even despite the slowdown in the economy, but could soften some tactics as necessary, sources and analysts said. .

President Xi Jinping appears determined to go ahead with the latest round of property policy tightening, even if the pain increases in the short term, in contrast to previous occasions where they tended to fade as growth began to falter, they said. .

Xi’s decision stems from a long-term structural push to reduce the economy’s dependence on property and debt and channel more resources into high-tech manufacturing and other emerging sectors to fuel growth.

Despite the rapid expansion of other industries in recent years, real estate and related sectors such as construction continue to account for more than a quarter of China’s Gross Domestic Product (GDP).

The world’s second-largest economy has seen an impressive rebound after the pandemic, but there are signs that the recovery is running out of steam. Growing power shortages are adding to pressure from housing restrictions, a lack of raw materials, supply chain disruptions, and weak consumer spending.

Global concern has also intensified about a possible contagion of credit risk from the Chinese real estate sector to the broader economy, as China Evergrande Group faces more than $ 300 billion in debt.

Liu He, Xi’s top economic adviser, has repeatedly warned of financial risks, while Guo Shuqing, head of the banking regulator and the People’s Bank of China (PBOC), has said that the property is the largest “gray rhinoceros. ”From the country, referring to a significant threat that is often ignored until it is too late.

“The brakes on property will be painful, but it is a price that must be paid. In the past, controls were always loosened due to economic recessions, but this time the determination of the leaders seems very firm, “said a source who participates in internal political discussions.

The State Council Information Office and the PBOC did not immediately respond to Reuters requests for comment.

Red lines

Despite numerous campaigns over the years to curb high property prices, housing in China has become increasingly unaffordable, hampering Beijing’s efforts to boost birth rates and cope with rapid aging and slowing population growth, analysts say.

The authorities intensified the last real estate controls in August 2020, when the PBOC introduced new measures to closely monitor and control the debt levels of developers, establishing “three red lines” to curb their indebtedness and contain debt risks.

But the price for policy errors would be high, given the size of the industry, its importance as a source of revenue for local governments, and the risks to social stability in the event of a rapid collapse in house prices.

“We must give priority to the stability of the real estate sector. We do not want prices to go up quickly, nor do we want many developers to go bankrupt, “said Zong Liang, chief investigator at the Bank of China.

While the PBOC is likely to maintain its pressure on developers to reduce their debt and clean up their balance sheets, there would be some marginal changes to correct excessive credit tightening by some lenders, people familiar with the matter and analysts said.

Last month, as the Evergrande debt crisis escalated, the PBOC said it would safeguard the legitimate rights and interests of home buyers.

“The ‘three red lines’ are unlikely to change, but enforcement could loosen up a bit,” said Lian Ping, chief economist at Zhixin Investment. “The rule on home loans will not be relaxed, but the scale of such loans could go up a bit.”

Banks could also have more leeway to lend to real home buyers rather than speculators, and healthier developers could get more support, analysts say.

“Amid the worsening slowdown, we expect Beijing to step up fiscal and monetary easing measures, although it will largely maintain its restrictive stance on real estate and high-carbon sectors,” said Ting Lu, chief economist at China in Nomura, on a note.