MNI INTERVIEW2: China Central Gov Should Buy Unsold Houses
MNI (BEIJING) - China’s central government needs to issue debt to purchase unsold housing stock and to bail out local administrations as it prepares the economy for the impact of U.S. tariffs by boosting domestic demand, though there is a risk that policymakers will instead fall back on their traditional approach of relying on investment to drive growth, prominent economist Yao Yang told MNI.
A return to over-reliance on investment could worsen problems with overcapacity, and the risk of such as response has been increased by U.S pledges to curb China in hi-tech sector, Yao said in an interview.
With the top priority for policymakers being economic growth, the People’s Bank of China is likely to cut its policy rate at a steady pace while pushing down bank deposit interest rates, even at the cost of weakening the yuan, Yao said. The yuan is likely to depreciate this year if China’s growth rate falls to 4%-5% while the U.S. economy expands by 2.5-3.5%. (See: MNI: China Not Closed To Discussing Deal On Yuan - Advisors)
“Top policy makers have recognised the core issue now is weak demand and are taking measures to cope with it,” he said, “I think the policy priority to fix soft demand lies in stabilising house prices and helping local governments ensure basic operations.”
If the central government can allocate CNY1 trillion to establish a dedicated company to purchase surplus housing, it would have a strong effect on boosting confidence and demand, Yao said, adding that growing household sector savings show confidence is a greater factor restraining demand than slow income growth. (See MNI: PBOC To Make Q1 Cut After Stance Shift-Former Officials)
While the real estate market has exhibited positive signals since November as restrictions on house-buying have been eased and mortgage rates lowered, the government needs to step in and buy unsold stock in order to maintain momentum, he said.
China announced plans in October to allow local government to use special bonds to buy unsold homes and idle sites, but Yao said that their declining revenues and already heavy-debt burdens make this unfeasible.
The central government should issue CNY4 trillion to CNY5 trillion in special treasuries to assist local administrations to keep paying salaries and providing public services, as well as to repay business arrears to private companies.
Asset management companies should step in to sell local governments’ assets to repay their off-balance-sheet “hidden” debt, and banks which have lent to them will have to share in any losses, Yao said.