China is likely to maintain housing restrictions despite slowdown, perhaps soft tactics

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BEIJING – Chinese leaders, fearful that a lingering housing bubble could undermine the country’s long-term rise, are likely to keep tight restrictions on the sector even as the economy slows, but could soften some tactics as needed, sources said. policy makers and analysts.

President Xi Jinping appears determined to go ahead with the latest round of property tightening, even if short-term pain increases, in contrast to previous campaigns that tended to fade as economic growth began to falter, they said.

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Xi’s determination stems from a longer-term structural drive to reduce the economy’s dependence on property and debt and channel more resources into high-tech manufacturing and other emerging sectors to fuel growth.

Despite the rapid expansion of other industries in recent years, the real estate sector, along with related sectors such as construction, still accounts for more than a quarter of China’s gross domestic product (GDP).

The world’s second-largest economy has seen an impressive rebound from the pandemic, but there are signs that the recovery is losing steam. Growing energy shortages are adding to pressure from property restrictions, raw material shortages, supply chain disruptions, and weak consumer spending.

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Global concerns about a potential spill-over from China’s real estate credit risk into the broader economy have also intensified as major developer China Evergrande Group struggles with more than $ 300 billion in debt.

Liu He, Xi’s top economic adviser, has repeatedly warned against financial risks, while Guo Shuqing, head of the banking regulator and head of the People’s Bank of China (PBOC) party, has said the property is the “gray rhinoceros. “largest in the country.

“Gray rhino” refers to a significant and obvious threat that is often ignored until it is too late.

“Property restrictions will be painful, but this is a price that must be paid,” said a source who participates in domestic policy discussions.

“In the past, we always loosen controls due to economic downturns, but this time the leadership’s resolve seems very firm.”

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The Information Office of the State Council and the People’s Bank of China did not immediately respond to Reuters requests for comment.

RED LINES IN THE SAND

Despite numerous campaigns over the years to curb high property prices, housing in China has become increasingly unaffordable, hampering Beijing’s efforts to increase birth rates and address the rapid aging and slowing population growth, analysts said.

Officials increased the latest property restrictions in August 2020, when the People’s Bank of China introduced new measures to closely monitor and control developers’ debt levels, establishing “three red lines” to curb their lending and contain lending. debt risks.

But the price of policy errors would be high, given the size of the industry, its importance as a source of income for local governments, and the risks to social stability in the event of a rapid fall in house prices. Many Chinese have never seen a prolonged property decline.

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“We must prioritize stability in the real estate sector. We don’t want property prices to go up quickly, nor do we want many developers to go bankrupt, “Zong Liang, chief investigator at the Bank of China, told Reuters.

ARE MARGINAL CHANGES STILL POSSIBLE?

While the People’s Bank of China is likely to maintain its pressure on developers to reduce debt and clean up their balance sheets, some marginal policy changes may be possible to correct excessive credit tightening by some lenders, experts and analysts said. .

Last month, as the Evergande debt crisis escalated, the People’s Bank of China said it would safeguard the legitimate rights and interests of home buyers.

“The ‘three red lines’ are unlikely to change, but the implementation of the rules could loosen up a bit,” said Lian Ping, chief economist at Zhixin Investment.

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“The standard on home loans will not be relaxed, but the scale of such loans could go up a bit,” he said.

Banks could also have more freedom to lend to genuine homebuyers rather than speculators, and healthier developers could get more support, analysts said.

“Amid the worsening slowdown, we expect Beijing to step up fiscal and monetary easing measures, though it will largely stick to its tightening stance in real estate and high-carbon ones,” said Ting Lu, an economist. Nomura’s chief for China in a statement. qualification.

However, some local governments may introduce some minor relaxation measures, focusing on lifting local restrictions and adding some subsidies, Lu said.

Meanwhile, the PBOC has funneled more credit to the manufacturing sector in recent months, at the expense of the real estate sector.

Medium and long-term loans outstanding to the manufacturing sector increased 41.6% year-on-year in June, accelerating from a 24.7% increase a year earlier, while the growth of outstanding loans to the real estate sector slowed to 9.5% in June from 13.1% a year earlier, central bank data showed.

(Reporting by Kevin Yao; Editing by Kim Coghill)