Beijing’s Property Rescue Plan: More Debt and Overcapacity

CommentaryThe Chinese Communist Party’s (CCP’s) grand plan to rescue the property sector involves having local governments use debt to buy overpriced properties and sell them at a discount.Beijing has unveiled a rescue plan for its property sector, which is being called “historic.” It is historic in the sense that it is one of the largest property sector bailouts in China’s history. However, it will not resolve the country’s real estate crisis.The plan calls for local governments to buy up unsold homes and then sell or rent them out at below-market prices. This will only postpone the inevitable reckoning in the real estate sector’s dual problems of debt and overcapacity. Moreover, CCP intervention exacerbates the problem and adds more debt to the already mounting debt crisis.The plan has already been dubbed a success because, after it was announced, China’s stock markets rose. However, it is important to remember that short-term fluctuations in stock markets are based on sentiment, not changes in economic fundamentals.Chinese stock markets have lost $6 trillion in value over the last three years due to a general economic downturn and concerns over mounting debt and overcapacity in the property sector. This means that even a significant uptick would not return the markets to their previous levels. The fact that the stock market experienced a temporary rise does not prove that Beijing’s property rescue plan was a good idea or that it will save the property sector.Related StoriesThe rescue plan effectively diverts tax revenues to private developers. This will save these companies and prevent them from going bankrupt, allowing them to remain in business. However, their business is to build more properties, which perpetuates the problem.The property sector already suffers from oversupply, while young people cannot afford an apartment. Additionally, China is facing an aging crisis partly due to young people’s inability to buy an apartment and get married. In a free market economy, it is impossible to simultaneously have both an excess of apartments and an excess of would-be buyers. The price of apartments would come down to meet demand, and the market would reach equilibrium.An example of how a free-market property sector works can be seen in the West, including the United States. Many young people complain that housing prices are too high and they cannot afford a home. While this is true, it is different from the situation in China because there is no oversupply of homes in the United States and the West. The price of homes is high, yet there is no shortage of buyers. If fewer people were willing to pay the price for those homes, the prices would come down. However, in China, central government intervention prevents the price of homes from dropping to meet market demand.There are several reasons why Beijing is incentivized to maintain high housing prices. First, developers are some of the most heavily indebted entities on Earth, representing a significant percentage of bank loan portfolios. If property prices were allowed to fall to meet the market, these loans would be exposed, and property developers would go into default. A string of defaults among China’s largest developers could trigger a banking crisis.Another reason Beijing wants to maintain high property prices is that the real estate sector accounts for 20–30 percent of GDP. If the value of homes fell, the GDP would, too. China has experienced considerably slower growth over the last few years, and a significant loss of value in the property sector would result in a noticeable decline in GDP growth.As a side note, Western analysts have speculated for years that China’s GDP growth claims were inflated by the central government. This real estate crisis is proving those accusations correct. Beijing controls the price of real estate, which is a major factor in determining the size of the GDP. The real estate oversupply exists because Beijing artificially maintained high real estate prices. Therefore, Beijing artificially inflated China’s GDP.Not only will the plan not solve the real estate crisis, but it will also add to China’s debt. The People’s Bank of China is preparing a $42 billion fund to support the purchase of unsold properties. China’s debt-to-GDP ratio is already over 286 percent. A decrease in GDP would increase that number, so Beijing cannot allow housing prices to decline. At the same time, increased debt will cause this number to rise.Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.

Beijing’s Property Rescue Plan: More Debt and Overcapacity

.

Commentary

The Chinese Communist Party’s (CCP’s) grand plan to rescue the property sector involves having local governments use debt to buy overpriced properties and sell them at a discount.

Beijing has unveiled a rescue plan for its property sector, which is being called “historic.” It is historic in the sense that it is one of the largest property sector bailouts in China’s history. However, it will not resolve the country’s real estate crisis.
The plan calls for local governments to buy up unsold homes and then sell or rent them out at below-market prices. This will only postpone the inevitable reckoning in the real estate sector’s dual problems of debt and overcapacity. Moreover, CCP intervention exacerbates the problem and adds more debt to the already mounting debt crisis.
The plan has already been dubbed a success because, after it was announced, China’s stock markets rose. However, it is important to remember that short-term fluctuations in stock markets are based on sentiment, not changes in economic fundamentals.
Chinese stock markets have lost $6 trillion in value over the last three years due to a general economic downturn and concerns over mounting debt and overcapacity in the property sector. This means that even a significant uptick would not return the markets to their previous levels. The fact that the stock market experienced a temporary rise does not prove that Beijing’s property rescue plan was a good idea or that it will save the property sector.

The rescue plan effectively diverts tax revenues to private developers. This will save these companies and prevent them from going bankrupt, allowing them to remain in business. However, their business is to build more properties, which perpetuates the problem.

The property sector already suffers from oversupply, while young people cannot afford an apartment. Additionally, China is facing an aging crisis partly due to young people’s inability to buy an apartment and get married. In a free market economy, it is impossible to simultaneously have both an excess of apartments and an excess of would-be buyers. The price of apartments would come down to meet demand, and the market would reach equilibrium.

An example of how a free-market property sector works can be seen in the West, including the United States. Many young people complain that housing prices are too high and they cannot afford a home. While this is true, it is different from the situation in China because there is no oversupply of homes in the United States and the West. The price of homes is high, yet there is no shortage of buyers. If fewer people were willing to pay the price for those homes, the prices would come down. However, in China, central government intervention prevents the price of homes from dropping to meet market demand.
There are several reasons why Beijing is incentivized to maintain high housing prices. First, developers are some of the most heavily indebted entities on Earth, representing a significant percentage of bank loan portfolios. If property prices were allowed to fall to meet the market, these loans would be exposed, and property developers would go into default. A string of defaults among China’s largest developers could trigger a banking crisis.

Another reason Beijing wants to maintain high property prices is that the real estate sector accounts for 20–30 percent of GDP. If the value of homes fell, the GDP would, too. China has experienced considerably slower growth over the last few years, and a significant loss of value in the property sector would result in a noticeable decline in GDP growth.

As a side note, Western analysts have speculated for years that China’s GDP growth claims were inflated by the central government. This real estate crisis is proving those accusations correct. Beijing controls the price of real estate, which is a major factor in determining the size of the GDP. The real estate oversupply exists because Beijing artificially maintained high real estate prices. Therefore, Beijing artificially inflated China’s GDP.

Not only will the plan not solve the real estate crisis, but it will also add to China’s debt. The People’s Bank of China is preparing a $42 billion fund to support the purchase of unsold properties. China’s debt-to-GDP ratio is already over 286 percent. A decrease in GDP would increase that number, so Beijing cannot allow housing prices to decline. At the same time, increased debt will cause this number to rise.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.

.