MNI INTERVIEW: China To Contain Property Spillover - Advisor

China will work to ensure the property sector's adjustment, expected to unfold over several years, does not spill over into the financial system, a senior policy advisor to the National Development and Reform Commission told MNI, adding authorities will launch more policies aimed at stabilising sentiment, growth and employment to boost investment and consumer spending.

The property slowdown represents a significant headwind to China’s economic recovery and financial stability, together with local-government and small financial institution debt, said Wu Sa, deputy-director of the Economics Institute at the Academy of Macroeconomic Research, a think tank with a focus on development issues under the NDRC.

It is too early to say whether property has bottomed, he told MNI in an interview, adding the development of a healthier real-estate sector may take years. Oversupply of residential housing and weak sentiment towards house prices have undermined the property market, Wu added. (See MNI EM: China's Housing Trade-ins Will Struggle To Reverse Downturn)

Ensuring troubled developers can deliver housing represents an urgent task, he noted, suggesting local governments could buy some completed projects at low prices and use them for low-rent and affordable housing, which will help troubled developers while promoting social welfare.

FINANCIAL RISK

Property is a key source of collateral and home mortgages make up a substantial portion of banking assets, so the volatility of the sector could impact financial stability, he warned. Financial institutions will have to play a role to shore up the sector, reducing mortgage rates and increasing loans to developers in line with market principles, he added.

Authorities have already lifted restrictions on house purchases in most cities outside some of the biggest metropolises. (see: MNI EM: China To Continue Housing Relaxation As Developers Suffer)

While completely removing such limits in mega cities will attract buyers from lower-tier cities, Wu argued the impact on overall purchases is difficult to predict.

The latest indicators showed the property sector softened further in Q1, when real-estate development investment declined 9.5% y/y, accelerating from a fall of 5.8% in the same period of 2023. The floor area of commercial property sales dropped 19.4% y/y, picking up from a 1.8% decrease in Q1 2023, the National Bureau of Statistics said.

POLICY EFFORTS

With these developments ongoing, the government is taking measures to ensure the economy meets its growth target, Wu said, pointing to increased fiscal efforts and the NDRC’s provision of incentives for companies and consumers to trade in equipment and goods to fund replacements.

The People’s Bank of China has maintained a flexible, moderate and precise pace in recent years, and is working to channel funds idling in the financial system or used for arbitrage toward the real economy, he explained.

China has announced a plan to issue ultra-long-term special government bonds over the next several years, issuing CNY1 trillion this year, to fund major national strategic initiatives and critical areas for capacity building in safety and security, Wu noted. The raised fund will focus on key tasks such as accelerating high-level technological self-reliance, promoting urban-rural integration, encouraging balanced regional development, enhancing food and energy resource security and driving high-quality population growth, he said.

In addition, equipment renewals, particularly in the manufacturing and agriculture sectors, could result in a significant CNY5 trillion a year market, he said, despite China’s infrastructure investment entering a more mature, slower growth phase.

As investment and consumption support domestic demand, authorities are aiming for a gentle rate of inflation, reflected by increasing industrial profits, he added.

According to NBS, industrial profits jumped by 10.2% in the first two months of this year, compared to a decline of 22.9% over the same period last year.