MNI: China Needs Govt Property Fund, Rate Cuts –Senior Adviser

A senior advisor has called on policymakers to establish a state-backed fund of up to CNY100 billion to support the troubled property sector and provide better housing to people living in cities, while suggesting the central bank should cut rates to boost demand as inflation remains low.

Zhang Bin, a member of the 14th Chinese People’s Political Consultative Conference, China’s top advisory body, told MNI in an interview that he had suggested the government establish a national fund to assist the restructuring of property developers’ assets, increase the supply of government-subsidised houses, and to provide low-cost rental or commercial houses to new urban residents.

“The fund should be a non-bank policy financial institution with initial capital of about CNY50 billion to CNY100 billion, which is raised by issuing special treasury bonds,” Zhang said. He said the fund should acquire assets from developers to help provide them with liquidity, then package those assets into real estate investment trusts (REITs) and change the underlying properties to rentals or offer them for sale to low-income urban residents.

The fund could be piloted in big cities given the large number of new citizens and high demand for housing, and it should enjoy preferential policy support through tax and land provision by local authorities, said Zhang, who is also a senior fellow at the Chinese Academy of Social Science.

SOFT LANDING

The sharpened focus on property was underlined in former Premier Li Keqiang’s Work Report, which said policy should “support people in buying their first homes or improving their housing situation and help resolve the housing problems of new urban residents and young people.”

"A large number of low and middle-income groups in cities are still suffering housing issues, which is a significant shortcoming in China’s current housing sector,” said Zhang. The adviser said it was important to prevent the sector from becoming “excessively cold” given the model of high leverage and fast expansion had ended, and housing demand had peaked.

The real estate sector is unable to deal with trillions of distressed assets by itself, with a market-led deleveraging possibly threatening economy-wide credit expansion and even financial stability. (See MNI: China’s Prudent Targets, Stimulus Show Risks To Recovery)

President Xi Jinping’s edict that “housing is for living in and not for speculation” would not be changed, but in practice policy makers have no desire to see a hard landing, Zhang said. He highlighted the sharp increase in market volatility last year when many developers were trapped by a liquidity crunch and suffered debt defaults, while some withdrew from the industry.

“The sector is still crucial to the economy as it is related to bank credit, local government income, mortgages, as well as its long industrial chains involving big and small manufacturers and companies,” Zhang noted. “It is clear that supporting the sector is a focus of macro policy this year in an effort to shore up the economy,” he continued.

RATE CUT

Zhang said the People’s Bank of China had space to cut its policy rates as it is the most effective method to stimulate domestic demand as inflation remains low.

“Moderate inflation can benefit the economy via boosting household incomes, companies’ profits, employment, government taxation, as well as disposal of local government debt,” the economist said. A rise in the Consumer Price Index of around 3%, with core inflation at around 2.5%, would be more appropriate for the country, he said.

China's CPI rose 1% y/y in February and core CPI rose 0.6% y/y, data from the National Bureau of Statistics released on Thursday showed.