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The most interesting part of China’s stimulus announcement was the omission of a key phrase that sparked the 2020 crackdown on the real estate sector

China’s once free-spending property buyers are now cautious about their property purchases amid the country’s post-COVID economic slump.VCG/Getty Images

  • The real estate market in China is a big part of the economy, but it is now in a deep slump.

  • Beijing has been cracking down on excessive debt and speculation in the real estate market since 2020.

  • Authorities are now trying to boost the real estate market by encouraging consumption.

When Chinese President Xi Jinping proclaimed in October 2017, “Houses are for living in, not for speculating in,” this statement was met with huge applause in a sweltering real estate market.

The mantra popularized by Xi has been an official fixture in key official communications since 2016, as Beijing sought to cool down the sweltering real estate market, according to Bloomberg. Since 2019, the tagline has been present in every review of China’s top leadership, according to the outlet.

Today, China’s real estate sector is so deeply down that Beijing omitted any reference to Xi’s phrase at a major economic meeting in late July, which preceded a round of economic stimulus measures to revive the country’s economy.

Excluding the sentence is a big problem.

And while stark, the omission is in line with other major turns China has made since late last year, when it began moving out of on-off COVID-19 lockdowns.

Beijing has been trying to rein in real estate prices for years and succeeded in 2021, but it crashed the market

The slogan “Houses are for living in, not for speculating” first appeared in an official statement following a meeting of China’s top economic leaders in December 2016.

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To understand it, we have to rewind to the late 1990s, when China witnessed a decades-long boom in its real estate sector.

The sector grew so large that it – along with related industries – contributes as much as 30% to the country’s GDP, according to a January 2022 report by Spain’s Caixa Bank.

But the real estate craze was also fueled by debt. The market was so hot that Chinese developers took out huge loans to build apartments ahead of demand. In fact, developers built so many apartments that a fifth of China’s houses were empty, Insider’s Lina Batarags reported in October 2021.

Beijing is expected to have spent years trying to cool down the frothy market – and it looked like the industry might get some respite when it went through a downturn in 2014.

However, Chinese house prices began to rise steadily from 2015, leading to renewed concerns about an asset bubble that made property prices unaffordable for ordinary people.

To manage risk and affordability, Beijing began cracking down on the sector by introducing the so-called “three red lines” policy that regulates debt ratios for property developers. This measure was introduced in August 2020 to limit the amount of money that property developers can borrow.

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The debt ratios worked, but it started to throw the real estate industry into crisis in 2021 as real estate giant Evergrande went into a debt spiral. Other Chinese real estate developers ran into similar problems and the industry began defaulting on its bond payments.

In the background, there were concerns that China’s real estate crisis could spill over into the wider domestic and global economy.

“There are only a handful of private sector players in the housing market that remain, which means they haven’t defaulted on their bonds,” Bo Zhuang, a senior sovereign analyst at Loomis Sayles, told Insider.

“So I will say that the private sector has deleveraged too much in a short period of time,” he added.

Now China is trying to undo years of crackdowns to boost its weak economy

It didn’t help that China’s real estate slowdown also came at a time when the country was still struggling with temporary COVID-19 lockdowns, which weighed on growth. In 2022, the Chinese economy grew by 3% – well below the official target of 5.5%, adding even more pressure to the real estate sector.

And the general market slump is starting to seep into the real estate industry. The situation is now so dire that a developer in eastern China offered free gold bars to homebuyers. Another project in the same region is also offering a BOGO deal for those who purchase an entire floor of apartments, Nikkei reported Wednesday.

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Now Beijing is mainly trying to stabilize the real estate market through consumption rather than stimulating supply. This lynchpin is because it needs to support the sector but avoid the “Japanification” of its real-asset sector, Zhuang told Insider, referring to Japan’s economic stagnation since a bubble burst in the early 1990s.

To that end, the Chinese authorities are instead trying to fuel consumer demand.

Over the weekend, China’s largest cities, including Beijing and Shenzhen, said they would take measures to meet the needs of homebuyers, hoping it would support the real estate sector, Reuters reported.

On July 31, Beijing released a plan targeting the automotive, real estate and services sectors that aims to “fully exploit the fundamental role of consumption in economic development,” according to Insider’s translation of an official statement from China’s largest planning agency. the country. . Think of subsidies for smart green household appliances and building materials in rural areas.

“Steps have been timid, however, and the roadmap is still not entirely clear,” Nomura’s economists wrote in a July 31 note, viewed by Insider.

“While Beijing’s recent moves should be encouraged, markets should contain their enthusiasm about the magnitude and impact of these easing measures,” the note said.

Consumers are also unlikely to be clamoring for new apartments amid broad economic uncertainty, record high youth unemployment and slower economic growth.

“Households have lost the ‘animal spirit’ because they are no longer willing to invest or speculate their future in the housing sector. I will say they have permanent COVID scars,” said Zhuang of Loomis Sayles.

Read the original article on Business Insider

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