Xi (Foolishly) Plans Communist Answers For China’s Property Crisis.

International desk

04 Mar 2024, 20:26

If the leaks and rumors are true, Beijing stands ready to launch a new and radical solution to the economy’s property crisis – a government takeover.

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What the authorities refer to as “a new model” would replace the old emphasis on ownership with more rentals and use government funds to buy up bankrupt properties so that in time the government’s role in real estate would rise from 5% of the market at present to 30%. Such an act would surely take the nation back to its communist roots if not quite the days of Mao Zedong. If it would veil the property crisis for a time, it would in the long run do tremendous damage to China’s economic prospects.

It is not yet entirely clear what Xi Jinping and the CCP have planned. Indeed, Beijing has admitted that it has not yet worked out all the details. These, the authorities assure all, will be ironed out in time. From what material is presently available, Beijing will commit the equivalent of $280 billion a year for five years to buy up distressed private residential real estate developments and repurpose them as rental units. The plans also mention building still more units, some subsidized rentals, for a total of six million new units in 35 cities over the next five years. Beijing would impose severe restrictions on who could buy these apartments and would forbid purchasers from trading their units on the open market.

Vice Premier He Lifeng, Xi’s chief economic policy aid, claims that the resulting enlarged government role in the area would help in two ways. It would allow Beijing to control excess supply, he claims, and put a floor under residential real estate prices. There is much room for doubts here. For one, it is far from apparent that Beijing has the financial resources to execute such plans or even the will to do so if it could find the resources. For another, China already has some seven million empty housing units, and the population is shrinking, leaving open the question of how six million additional units – rentals or otherwise – would control supply or put a floor under prices.

Beijing’s ability to manage real estate also comes into question after considering how poorly the authorities have managed things to date. Prior to 2020, Beijing actively encouraged residential real estate development, pushing local authorities to get involved and ensuring easy credit terms for both developers and homebuyers. Private builders and speculators responded actively, taking on debt and pursuing increasingly dubious projects so that even as China was meeting its housing needs, such development reached the astronomical level of some 30% of China’s economy. Then in 2020, Beijing abruptly removed all this support. Not surprisingly, the highly leveraged and extended developers began failing almost immediately.

Had Beijing known its business, it would have removed the support gradually so that developers, homebuyers, and local governments could adjust. It also would have provided liquidity to financial markets immediately after the first of these failures, which was the giant developer Evergrande. That could have blunted the ill effects of so much questionable debt on the books of bond holders and financial institutions. By providing special credits to developers, not to bail them out but to enable them to complete apartments for which they had contracted and already received payment, Beijing could have saved the investments of literally millions of Chinese households who had pre-bought apartments. Such a move would have bolstered the confidence of both Chines homeowners and homebuyers.

After two years of zero effort, Beijing, late in 2023, offered tentative and inadequate palliatives, and now in the opening months of 2024 seems to have settled on a truly communist solution. Beijing’s gross mismanagement of the situation so far leaves little to no confidence in its plan to control a large portion of China’s housing stock. No doubt the huge amounts of cash involved, if Beijing can put it to work, will cloak the immediate effects of the property crisis, but otherwise, these plans will hamstring China’s growth model fundamentally and perhaps permanently.

Wealth is the key consideration. In many ways homeownership provided the basis of China’s boom after Deng Xiaoping first opened the economy some 50 years ago. In Chinese culture but also globally, real estate constitutes the bulwark of household wealth. The dream of amassing it in China provided great motivation after the opening, and once that wealth began to grow, it encouraged spending and the use of credit, both of which spurred what turned out to be a truly outstanding record of economic growth. The importance of homeownership and the impetus it has provided is evident in the fact that more than 80% of Chinese households own their own home, a far higher percentage than in most developed economies, including the United States, where the figure is about 66%.

The CCP’s seeming plan to emphasize rentals threatens this engine of growth and wealth creation. Even when permitting purchases, Beijing’s plan detracts from the wealth creation by forbidding trading the new units on the open market. Practically speaking, this policy makes those units less like home ownership and family wealth and more like a rental with a very long lease. If these plans go into effect and still worse if Beijing builds on them, China will face much worse economic problems in the future than it does today. Xi and his cronies in the Forbidden City will have shut down a critical engine of economic motivation and growth.

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