Chief China Strategist
Summary: The Chinese housing market is undergoing a significant policy shift, as evidenced by the April 30 Politburo meeting which shifted focus from affordable housing to addressing housing inventory overhang. This was followed by the State Council's May 17 conference, unveiling policies to boost demand, including the PBOC funding SOEs to buy unsold properties. As the Third Plenary Session approaches, further policies are anticipated to boost sentiment and ensure stability, but the market faces risks if reforms focus solely on state-driven initiatives, potentially leading to a summer setback.
The Chinese housing market is at a critical juncture as recent developments signal a significant shift in policy direction. The first indication came on April 30, 2024, when the Politburo deviated from its previous focus on affordable housing and urban village renovations, instead emphasizing efforts to address the housing inventory overhang. This change was followed by the State Council's May 17 conference, where new policies were unveiled to boost housing demand and stabilize the market. As the government prepares for the Third Plenary Session of the 20th Central Committee in July, further measures are anticipated, aiming to boost sentiment and ensure stability ahead of the important meeting.
The signal of a pivot by the Chinese authorities in deleveraging the housing sector first emerged on April 30, 2024, when the Politburo omitted its year-long directive of focusing on building more affordable housing and renovating urban villages. Instead, it called for the first time to mobilize national and cross-ministry efforts to resolve the inventory overhang in the housing sector. Soon after that, the Ministry of Natural Resources issued a notice to restrict land supply for new residential properties. Cities with inventory cycles over 36 months must halt land sales until cycles fall below 36 months. Cities with cycles between 18 and 36 months can sell land equal to the amount of successfully sold property inventory.
A couple of weeks later, the local authorities of the Linan Region in Hangzhou and the Dali Bai Autonomous Prefecture in Yunnan Province announced plans to acquire unsold properties from developers to convert them into public rental housing. The Dali local government further announced that it would not build new affordable housing in areas where existing housing inventories exceed 24 months of sales in order to reduce housing inventory. An emerging trend of restricting housing supply while aggressively boosting demand emerged.
On May 17, the State Council held a video conference chaired by Vice Premier He Lifeng, who is responsible for the economy. The readout from the conference highlighted He’s comments that the governments of cities with relatively high housing inventories could pay reasonable prices to acquire some of the residential housing inventory to convert into affordable housing. In the afternoon, the State Council held a press conference, alongside officials from the Ministry of Housing and Urban-Rural Development, the Ministry of Natural Resources, the People’s Bank of China, and the National Financial Regulatory Administration, to announce several new policies confirming a shift in the Chinese authorities' approach to the housing sector. These new policies aim to boost households' ability to leverage up to buy properties and involve the central bank printing money to provide to state-owned enterprises (SOEs) via banks, encouraging SOEs to acquire unsold properties and convert them into affordable housing.
Specifically, Tao Ling, Deputy Governor of the People’s Bank of China (PBOC), announced four new measures at the conference:
The most significant policy development is the PBOC’s money printing to fund local government-controlled SOEs to buy unsold properties from private developers. While the RMB 300 billion initiative, potentially enabling the purchase of RMB 500 billion worth of unsold properties, is dwarfed by the projected RMB 5 to 7 trillion required to clear the estimated 750-770 million square meters of residential housing inventories, and it is true that converting unsold housing units into low-priced affordable housing may cannibalize the primary property market, the signalling effect is still significantly positive in boosting investor sentiment.
The readout from the April 30 Politburo meeting included the announcement of the decision to hold the much-awaited and overdue Third Plenary Session of the 20th Central Committee in July. It is plausible that more policies will be unveiled in the lead-up to the Third Plenary Session to create a more favorable setting when China’s top leaders gather to discuss and formulate the strategic blueprint for the development of the Chinese economy.
Ensuring the delivery of presold properties is a priority for the Chinese leadership, not only for economic reasons but also for social stability. Therefore, the Chinese Government is likely to roll out policies soon to intensify its efforts in this area, using a similar strategy of buying unsold properties but on a much larger scale. The aim is to provide funding to SOEs to take over presold but not yet completed housing projects. The funding could come from the PBOC through another re-lending program to support SOEs or from the central government by issuing bonds to provide capital to asset management companies or investment funds, which can then take on loans from banks to finance their purchase of these projects.
The anticipation of policies to boost the economy is likely to rise in the near term, spilling over from the pivot in housing policy to stimulus policies in other areas. Additionally, President Xi has repeatedly hinted that the Chinese leadership has reached a consensus to deepen reforms. This may spark some optimism about potential market-friendly reforms. However, given developments over the past decade, while expectations may improve, they will likely remain measured.
Investors may be disappointed if the reform and development strategies for the next five years, decided at the Third Plenary Session, remain focused solely on the “new productive force” and “self-reliance,” which tend to favor state-driven technological innovation and industrial policies supporting hard technology, advanced manufacturing, and agricultural technology. In other words, the equity market's upward momentum may persist in the near term but risks a significant setback in the summer.
The low valuation and extreme underweighting in China/Hong Kong equities earlier in the year have largely vanished and will not provide the same support to the market if sentiment turns negative.
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