China tries to save its crisis-ridden real estate sector

China’s real estate sector has long been an engine of growth, driven by the country’s rapid urbanization and the population’s rising standard of living: a construction boom that has accompanied the rise of the world’s second-largest economy. But in 2020, the government put a stop to this, by tightening the conditions of access to credit for real estate developers, in order to reduce their debt. Across the country, entire neighborhoods of unfinished housing are now abandoned, angering buyers who often have to pay in advance for their apartment or house.

Some promoters quickly found themselves on the verge of bankruptcy triggering an epidemic of unfinished housing and causing prices to fall, which dissuaded many Chinese from investing in real estate. And while the Chinese economy is struggling to recover from the Covid years, the persistent crisis in real estate raises fears of a contagion effect on other sectors of activity.

Evergrande was one of the first major developers to make a move. In January, a Hong Kong court issued a liquidation order given the group’s repayment difficulties, which have been in default since the end of 2021. Country Garden, another major developer, is also threatened with liquidation by a creditor who has taken the matter to court in Hong Kong.

For months, economists have been advocating a large-scale recovery plan to save the real estate sector: this was done on Friday, including the reduction of the contribution necessary for a first purchase and the proposal that local authorities buy back housing not sold or not delivered. Calling the contribution now required (15%) the “lowest in history”, Yan Yuejin, research director of the Yiju Research Institute, a think tank, said he was satisfied with the measure.

“Its impact will be enormous,” he predicts, ensuring that he is “very optimistic about its potential effect on the real estate market.” Furthermore, “the local authorities concerned should properly manage the unoccupied residential properties thus transferred by taking them back, purchasing them (…) in order to help housing societies which have financial difficulties to resolve their problems”, announced the vice -Prime Minister He Lifeng.

Even if the precise details of each measure have not been revealed, this real estate recovery plan is considered one of the most ambitious so far.

If the measures are welcomed by economists, their impact on the entire economy remains to be seen: official figures published Friday show that the recovery remains uneven in the world’s second largest economy. Thus, although industrial production accelerated in April, retail sales, the main indicator of household spending, are still struggling.

In real estate, prices and the volume of sales also continued to fall in April. These gloomy figures seem “to have finally triggered a feeling of urgency strong enough to force us to take concrete actions,” said Société Générale analysts Wei Yao and Michelle Lam in a note published Friday.

“The most important positive change in our eyes is the desire of leaders to change course, moving away a little from the idea of ​​​​focusing solely on increasing supply in the long term,” they add. . “The likelihood that the real estate sector will soon bottom out is increasing, which is a factor likely to reduce economic imbalances” and “revive confidence,” the analysts conclude.