(Bloomberg) -- China is considering a new funding option for local governments to buy unsold homes after a series of rescue packages failed to prop up the market, according to people familiar with the matter.
The latest proposal would allow local governments to fund their home purchases by issuing so-called special bonds, the proceeds of which are currently restricted to uses including infrastructure and environmental projects, the people said, asking not to be named discussing private information. Local governments have already used more than half the 3.9 trillion yuan ($546 billion) quota for special bond issuance this year; it’s unclear what portion of the remainder might be directed toward home purchases if the plan is approved.
While deliberations over a new funding channel underscore the growing urgency among Chinese policymakers to draw a line under the nation’s real estate crisis, the proposal would face many of the same hurdles that have challenged past rescue attempts. Only about 8% of the 580 billion yuan available from existing rescue funds has been tapped so far, including a high-profile initiative to backstop home purchases with central bank funding, according to Bloomberg Intelligence.
That’s partly because the expected return from turning unsold homes into affordable housing has stayed below the cost of funding for many local-government borrowers. Rental yields in China’s tier-1 cities averaged just 1.4% in 2023, compared with the central bank’s relending rate of 1.75%, Macquarie Group Ltd.’s economists wrote in May, citing data from Centaline Property Agency. The city of Beijing has recently issued one-year special bonds at 1.65%.
What Bloomberg Intelligence Says
Any further sweeping measures to rescue China’s property sector might fall short of turning around the industry’s fundamental outlook, given substantial difficulties in implementing these bailouts along with ongoing structural problems.
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China had 382 million square meters of unsold homes as of July, equivalent to about the size of Detroit, according to official data. The crisis has dragged down everything from the job market to consumption and household wealth over the past two years. President Xi Jinping unveiled sweeping goals last month to bolster the finances of China’s indebted local governments and give them more autonomy in regulating local property markets, though public details of the initiatives have so far been limited.
The Ministry of Finance didn’t immediately respond to a request for comment.
While state buying of housing inventory is widely seen as a key step toward easing the housing glut and boosting developers’ finances, the central bank’s initial funding is just a fraction of the 1 trillion yuan to 5 trillion yuan that some analysts estimate is needed to address the supply-demand mismatch. Iron ore futures in Singapore reversed earlier losses and traded higher on expectations the moves may help revive the housing market and boost demand for steel.
Still, investors remain skeptical that the easing measures unveiled so far are sufficient to stop the freefall in the housing market. China’s new-home sales fell 19.7% from a year earlier in July, while first-hand home prices dropped at their fastest pace on a year-on-year basis in nine years.
The state-backed Securities Times reported last week that several first-tier cities are expected to roll out detailed measures for the government purchasing of unsold homes. The eastern city of Nanjing is another one making such preparations.
Separately, the Ministry of Natural Resources said in June that it is working with the National Development and Reform Commission to roll out a policy that would allow local governments to buy land using special bonds.
China is facing mounting challenges from rising US tariffs to high youth unemployment. The question now is whether authorities can muster the right mix of financial firepower and policy adjustments to bolster confidence without returning to the speculative excesses of previous decades.
The International Monetary Fund called on China to deploy “one-off” fiscal resources to complete and deliver pre-sold properties, which would amount to almost $1 trillion, based on Bloomberg calculations. The country ruled out the solution.
Expectations of a big bazooka have further been dampened after the People’s Bank of China Governor Pan Gongsheng said in a Xinhua interview last Thursday that while the central bank would pledge further steps to support the nation’s economic recovery, it wouldn’t be adopting “drastic” measures.
--With assistance from Jinshan Hong, Emma Dong, Jing Zhao and Megan Durisin.
(Updates with iron ore price reaction in seventh paragraph)
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