Beijing's Hesitant Approach to Solving China's Deepening Property Crisis

From its inception, Beijing's approach to addressing the property crisis has been marked by inconsistencies and confusion. When the massive real estate developer Evergrande was unable to meet its financial obligations in 2021, authorities took a hands-off stance, choosing not to intervene either to assist Evergrande and its customers or protect Chinese financial markets from the ensuing fallout. This inaction allowed the problem to escalate into a broader economic and financial crisis that has since affected several key developers, including Country Garden.

Only recently, as Beijing became aware of the severity of the situation, the government took tentative steps with limited measures designed to restore confidence in real estate investments. The most recent effort is worth noting: an injection of 1 trillion yuan $140 billion in ultra-long-term debt to be used for purchasing vacant housing and repurposing it into affordable accommodations across China.

Beijing's approach appears commendable compared to its previous inaction, yet it falls far short in addressing the underlying issues. When viewed agnst the backdrop of Evergrande's initial debt exposure amounting to around $300 billion, and considering subsequent developments involving other major developers, Beijing would need a remedy totaling multiple trillion yuan.

Moreover, this latest program targets housing in less affected areas while China’s most urgent need for affordable housing is concentrated in first and second-tier cities. The mismatch between the location of avlable properties and where they are needed underlines the complexity of Beijing's plan. Additionally, low rental yields in these critical areas - a mere 1.64 as of May this year compared to financing costs averaging around 1.75 – indicate that few private parties would be incentivized to participate.

The program faces further challenges due to the reluctance of banks and local governments in China. Local authorities, burdened with debt from previously promoted infrastructure projects, struggle to provide basic services for their populations. This debt issue is evident in Beijing's decision to fund this initiative through central government credit.

As a result, while Beijing alleviate the property crisis and revitalize its economy, the most effective solutions require significantly more public financing than currently planned. The Chinese government's best attempts will likely face considerable hurdles, extending well beyond their desired timelines for resolution of this significant national issue.

Follow Milton Ezrati on Twitter: @MiltonEzrati

Milton Ezrati focuses his expertise in economics, finance, and public policy as they intersect with China. Currently, he serves as the chief strategist at Cenera Global, a financial services firm that seeks to provide comprehensive solutions for navigating global markets.

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